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Fareed Zakaria GPS

Thanksgiving Today; Interview with Admiral Mullen; 'Where in the World' Have Your E-mails Been?

Aired November 28, 2010 - 10:00   ET

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

FAREED ZAKARIA, HOST: This is GPS, THE GLOBAL PUBLIC SQUARE. Welcome to all of you in the United States and around the world. I'm Fareed Zakaria.

It's Thanksgiving weekend, America, the time when all Americans settle back and appreciate the extraordinary good fortune that this country has brought to its citizens. Today it's become a kind of secular national holiday and a moment to give thanks for all the material and nonmaterial blessings of life, but it traces its origins to one particular community and customs - the Puritans.

Needless to say, the original Thanksgiving bears little resemblance to modern American Thanksgivings. In their origins, these were essentially religious observances, dominated by church and prayer, not massive food fests followed by professional football.

Puritan America has left few traces on modern American life, and perhaps it's just as well. They were a doer lot, the Puritans, worried about moral corruption, human weakness, depravity, and always vigilant against temptation. When I think of them, I always recall H.L. Mencken's pithy line that they were a people who are haunted by the fear that someone somewhere might be happy.

But the Puritans did have one overriding belief that was powerful and productive. They believed in and instilled in American culture the idea of delayed gratification. In fact, the sociologist Daniel Bell argues that the key to the success of American Protestant (INAUDIBLE) might well have been that culture of delayed gratification or deferred gratification.

Translated into modern day economics, it means a focus on investing for the future and not consuming in the present. You understand why I say that the Puritan influence is nowhere to be found in America today.

Today, the Friday after Thanksgiving is noted because it is supposed to be the busiest shopping day in America. In fact, rather, it is one of the busiest. It does not actually occupy the top spot. That honor goes to the Saturday before Christmas, another holiday once marked by religious observance that is now dominated by shopping.

In any event, whether it's good morals or not, delayed gratification is good for long-term growth. If you look at East Asian countries, all of which have grown miraculously over the last 40 years, the key ingredient has been an ability to invest for the future rather than consume in the present. They spend massively on education, health, infrastructure, so they end up with a country with modern factories and facilities and an educated and healthy workforce.

The modern day Puritans are not in Massachusetts, but in China and South Korea. Maybe they need to start celebrating Thanksgiving out there, and, I don't know, we should perhaps hold a big Mardi Gras party.

We have a great show for you today. First up, the top military man in the United States, Admiral Michael Mullen, Chairman of the Joint Chiefs of Staff, on the world's trouble spots.

Then, "What in the World?" Does the Chinese government know what websites you visited, what e-mails you sent or received? Maybe. We'll explain.

Next, David Stockman, Ronald Reagan's Budget Director now says that the Republican Party, his party, has abandoned its principles and crippled the economy in the process. We'll hear from him on what it will take to fix the economy.

Finally, a "Last Look" at the national sport of Afghanistan and what this brutal fighting could tell us about that country.

Let's get started.

(BEGIN VIDEOTAPE)

ZAKARIA: Joining me now, Admiral Mike Mullen, the Chairman of the Joint Chiefs of Staff. He is the nation's top military officer and the principal military advisor to the president of the United States.

Admiral Mullen, thanks for coming on.

ADMIRAL MICHAEL MULLEN, CHAIRMAN OF THE JOINT CHIEFS OF STAFF: Good to be with you, Fareed.

ZAKARIA: North Korea. Why are they doing this?

So we have the sinking of the ship in March. We have the revelation about the nuclear facilities just last week, and now this incident, essentially an attack on - on South Korea. What do you think is going on?

MULLEN: Well, certainly, Kim Jong-Il has been very difficult to predict, and in - if anything, he is consistent and predictable only in his unpredictability. But certainly what happened with the killing of the 46 South Korean sailors, what happened with the development of the uranium enrichment facility as well as, obviously, the artillery incident earlier this week that he initiated, there are many that believe this is part of his posturing for the succession of his young son, who I think is 27 years old. So, in the near term, sort of focused in that regard. But I - I believe his main focus is to continue to develop nuclear weapons, to continue to get the world's attention, and to continue to move - try to move himself up to a level that is regarded as, you know, sort of a world player. And, in fact, he's got a country that's starving its people, whose economy is absolutely dreadful, and he continues to take actions - and I think very deliberate actions - to destabilize a region that - that could be very dangerous for all of us, including - not just the regional players, although I think, certainly, China has a great deal at stake with stability.

ZAKARIA: And - and why does China not push harder? I mean, it seems as though they are the ones that provide energy and fuel that keeps the regime alive, and yet it is very difficult to get them to push either on the nuclear issue or on even the ships - on - on the sinking of the ship where they did not actually even condemn it.

MULLEN: Yes. I - I actually agree with you on that. It's hard to know why China doesn't push harder. Clearly, I know that China has been very concerned as we have dealt with, and with making sure that the Korean people are - are supported as best they can.

They clearly are interested in this - in the region not spinning out of control, so my sense is they try to control this guy, and I'm not sure he is controllable. And if - if we get it wrong, all of us, including China, the downside here with his development of nuclear weapons, potential use of nuclear weapons, is developing missile capability which over the - you know, in - in the - in the future will be able to threaten ballistically, ballistic missile capability which will threaten the United States and others.

So he's - so he continues to move in - in this direction, and I think we all have to focus on getting his attention. But, in particular, China, in terms of focusing on his vulnerabilities and making sure that that part of the world doesn't come undone.

ZAKARIA: Is it fair to say, given the great powers involved -- China, Russia, the United States, South Korea, North Korea - so, this may be the most dangerous place in the world?

MULLEN: Certainly it potentially - I would say that. And - and to some degree, because of his unpredictability - and because of this transition. We don't know much about his son specifically, so - and - and that's - part of the challenge is trying to understand the regime and understand what motivates them.

But I - I am one who believes we shouldn't be rewarding bad behavior here, and, yet, he continues to generate that behavior in hopes that he can get attention - enough attention to move in some direction that's, quite frankly, not determined.

I don't trust him. I mean, he's lied continuously. He's - he's has done things against the U.N. sanctions. He's done things against his own word. In 2005, where he said that, you know, he would move in a certain direction, and he hasn't done that. So he's not a guy we can trust, and that's why the - that's why the - the leadership aspect of this from China is so important, because if any country has influence in Pyongyang, it's - it's China.

ZAKARIA: Let's talk about Afghanistan, an area where the United States still has a lot of influence. What can - what do we make about these reports from - broken by the "New York Times" that the number two person in the - in the Taliban, supposedly we were - the Afghan government was negotiating with, we were supporting, turns out not to be the right guy. Is it true? And isn't this pretty embarrassing?

MULLEN: Well, I think that as - as far as we've gotten in any kind of reconciliation discussion, it's been, I think, as Dave Petraeus said, it's been talks about talks. We really haven't made a lot of progress, and it's my belief that we also need to do this from a position of strength.

Now, this whole reconciliation effort is - is led by President Karzai, and the reality is that we had suspicions about this guy very early, and - and we were, you know -

ZAKARIA: Did you tell the Afghans that you had those suspicions of the Karzai government?

MULLEN: Well, I think everybody had suspicions, very specifically, and - you know, it just took a little while to verify that. You know, this - this wasn't a - a continuous set of meetings. It lasted over a period of time.

But there were very early, initial suspicions, and it took a little while to verify, you know, who he was or who he wasn't, and, in fact, it turns out that he wasn't the guy that he was claiming he should be.

But, in this process, Fareed, we're -- it's - it's a very important process. There clearly, at some point in time, will be - a part of this will be the political reconciliation and the negotiations that go along with that, but I still think that --

ZAKARIA: With - with the Taliban?

MULLEN: With - yes. Absolutely. With the Taliban, at some point.

But we need to do that from a strong position, and we're just not there right now. And - and the Taliban don't think they're losing, and the likelihood that they're going to take any significant steps with respect to reconciliation, I think, is low.

ZAKARIA: But, you know, when one reads about these intelligence failures, if - if you look at the North Korean nuclear facility, which we were taken by surprise, you could look at this Afghan guy, it is puzzling. I mean, we spend tens - we spend more money on intelligence than the rest of the world. We spend $60 billion on it. You oversee a large part of that.

MULLEN: Sure.

ZAKARIA: Why does this happen? In the private sector, these guys would all be fired.

MULLEN: Well, I think that's - I think it's just too simple an answer. I mean, there is an extraordinary group of professionals who are working hard to - to uncover from an intelligence standpoint all the intelligence and information that we need, and I have seen that. I mean, I'll shift just quickly to the - the recent threats coming from Yemen, with al Qaeda on the Arabian peninsula there. and the cargo flights, the bombing that was - the potential - the Times Square incident, and also last year in Detroit.

So, an awful lot of people working hard to make sure something doesn't happen, and then, specifically, again, with - with Mansour, there were immediate suspicions, but it just couldn't be validated for a while. So, in fact, the intel world actually tipped us in the right direction with respect to that. This was somebody that didn't have a meeting with Karzai, as far as I know. He was meeting with his intermediaries.

So there are an awful lot of good people, in a very complex world, trying to make sure we get the intel right.

ZAKARIA: We have to take a break. When we come back, we're going to talk about Iraq, Iran, Yemen - all the fun spots in the world, with the Chairman of the Joint Chiefs of Staff, when we come back.

(END VIDEOTAPE)

(BEGIN VIDEO CLIP)

ZAKARIA: Last week on this program, Mohammad Larijani, a senior Iranian official, says we absolutely categorically have no intention of weaponization, no - no nuclear weapons, just a weapons program. Do you believe that?

MULLEN: I don't believe it for a second.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

ZAKARIA: And we are back with the Chairman of the Joint Chiefs of Staff, Mike Mullen.

Another set of WikiLeak documents. The - the founder of WikiLeaks says that this is telling truth to power. This is how we open up the process. Do you think that this endangers the lives of American troops, these kind of leaks?

MULLEN: Absolutely. Not just American troops, but it also endangers the lives of other individuals that we've engaged in our - in our overall efforts, whether they be in Afghanistan or other countries. So I think it's a very, very dangerous precedent.

What I don't think those who are in charge of WikiLeaks understand is we live in a world where just a little, bitty piece of information can be added to a - a network of information and really open up an understanding that just wasn't there before. So it continues to be extremely dangerous, and I would hope that those who are responsible for this would, at some point in time, think about the responsibility they have for lives that they're exposing and the potential that's there and stop leaking this information.

ZAKARIA: I'm going take you on a tour of the world, because we don't have a lot of time. Iran - you have been consistently suspicious of Iran's nuclear capacity. I remember talking to you about this, and you said it publicly.

Last week on this program, Mohammad Larijani, a senior Iranian official, says we absolutely categorically have no intention of weaponization, no - no nuclear weapons, just a weapons program. Do you believe that?

MULLEN: I don't believe it for a second. In - in fact, information and intelligence that I've seen speak very specifically to the contrary. Iran is still very much on a path to be able to develop nuclear weapons, including - and including weaponizing them, putting them on a missile and being able to use them.

ZAKARIA: Do you - do you believe that it is - it is - now is the time to start thinking about military options?

MULLEN: Well, we've actually been thinking about military options for a significant period of time, and I have spoken and many others that we've had options on the table. We continue to do that, and we continue - and we will continue to do that in the future.

I still think it's important we focus on the dialogue, we focus on the engagement, but also do it in a realistic way that - that looks at whether Iran is actually going to tell the truth, actually engage, and actually do anything. We've got a history of gamesmanship that certainly doesn't include closing on significant steps to indicate to indicate to the international community that they're not doing this.

ZAKARIA: When - when we look at Afghanistan, 2011 is meant to be the time we start drawing down. Will there be real draw downs in American troops? And I will define that as 5,000 troops or more.

MULLEN: Well, we're not picking a number, as I think you know. But, yes, we will start drawing down troops next July. There's no question about that. We'll - it will be based on a recommendation from General Petraeus, and he will make that based on conditions on the ground. We don't know from what province, and we don't know how many, but we're very committed to starting that drawdown there.

All of that said, every indication that I can see is there's certainly going to be a substantial number of allied troops - U.S. and allied troops - in Afghanistan after July 2011.

ZAKARIA: But there will be a significant draw down?

MULLEN: There'll be a draw down. I'm not going to describe it in either terms - in terms of number because, Fareed, honestly, I just don't know yet. I - I really got to wait for Dave Petraeus to make a recommendation.

ZAKARIA: Are there any circumstances in which you can imagine there being a significant build-up of troops in Yemen, American troops? We have a few advisories -

MULLEN: Yes.

ZAKARIA: -- but, I mean, more substantial.

MULLEN: Not that I can see in the near future based on the conditions there. Certainly, this is a sovereign country. We have some support troops that are basically doing training there, but I certainly - it's not for me to decide. But, certainly, I don't see any indication that we're going to have a significant number of troops in Yemen.

ZAKARIA: Final question, in Yemen, we face the same dilemma we face to other places. We - we need to fight al Qaeda, so we support a dictator who rules the country in a pretty tough way, and a lot of people tell us your support for this guy is fueling anti-Americanism and fueling the Jihadis.

MULLEN: Yes, well - well, I don't - there's no easy answer here. Certainly, as I watch this over the last couple of years, President Saleh has stayed with us in a very solid way. And now, he's been there a long time, as leader of that country.

But this isn't also the first time in our history where we've - we've worked with individuals who are controversial individuals. I think we've done that in the past. We're doing it now, to address the threats that really threaten Americans.

This al Qaeda group in Yemen is trying to kill Americans, and has. Recently, just looking at these last two cargo plane bombs that they put in place. So I think that will continue, and we - where I feel we're obligated to continue to address that threat.

ZAKARIA: Admiral, a pleasure and honor to have you on.

MULLEN: Thanks, Fareed.

ZAKARIA: Thanks.

We will be back.

(COMMERCIAL BREAK)

ZAKARIA: And now for our "What in the World" segment.

I want you to think back to April 8th of this year. What e-mails did you send, what web sites did you visit, say, around noon Eastern time that day? You probably have no idea. Neither do I. But there might be a record of it in China.

For 18 minutes on that day at noon, China apparently might have hijacked massive volumes of web traffic, 15 percent of all the internet routes (ph) in the world. That's what a new report to Congress from the U.S. China Economic and Security Review Commission says.

What does that mean? Well, Dmitri Alperovitch, the vice president of Threat Research at the computer security giant McAfee, says think of this like the post office. It would be like somebody rerouting letters going to 15 percent of the world's postal codes. If you lived in one of those postal codes, instead of your mail going from, say, New York to Los Angeles directly, it would have stopped in China along the way.

In this case, it wasn't just e-mail. It was web browsing, instant messages, web-based phone calls, video conferences - anything transmitted over the internet that went through the servers of China Telecom, China's state-owned communications company.

According to the report, the hijacking was not just private individuals' messages, but included dot gov and dot mil sites too. These are, of course, the U.S. government and U.S. military's domains. And the report says the incident affected internet traffic to and from the United States Senate, the U.S. Army, Navy Marine Corps and Air Force, as well as the Office of the Secretary of Defense and NASA.

In the wake of the incident and the new report to Congress, there have been many denials. The Pentagon told CNN that the security of Defense Department information isn't affected by misdirection of internet traffic. The Chinese embassy in Washington called the reports' allegations specious, unwarranted, and irresponsible, saying China will never do anything to harm other countries' national security, either in real or in virtual worlds.

To be clear, the hijacking could have been an accident or a mistake and all of that data could have passed through China's servers untouched. Or it could have been intentional, and Chinese intelligence agents have now sifted through all of that data. We just don't know, and that's part of the problem.

This is a new arena of great power rivalry, one that operates under the radar screen, but it is a crucial source of power. Imagine if we went to war with Iran, and, in response, suddenly the computers that control New York and Washington's electricity grids crashed?

So much of modern life is totally dependent on computers that their security and survival are vital to a country's well being. We need to take a whole slew of security measures to protect our systems. We also need to talk to other countries and develop codes of conduct, arms control agreements, if you will, for what is acceptable and unacceptable in this realm.

This is a murky world of cyber war, and it could get very messy, and eventually have real world explosions if we don't get careful.

Meanwhile, you might just want to go back to your sent mail folder for April 8th and see what - what messages you did send.

And we will be right back.

(BEGIN VIDEO CLIP)

DAVID STOCKMAN, FORMER DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET: We're just printing money. We're literally printing money to pay the government's bills, and there's no case in history where that's worked for very long.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

ZAKARIA: The great political question of our time is whether the GOP, the Republican Party, can get the United States' fiscal house in order. That's what it campaigned on.

Now, in the GOP mindset, Ronald Reagan's presidency is often held up as the shining economic example that transitioned this country away from the malaise of the Carter years to the booming 1980s and '90s and that this is what we should all be trying to do.

Well, Ronald Reagan's first budget director was a 34-year-old Congressman from Michigan named David Stockman. Stockman left politics 25 years ago, but he is so worried about where we are headed, he has reentered the national debate. David Stockman joins me now. Welcome.

STOCKMAN: Great to be here.

ZAKARIA: So tell me what the economy looks like, first of all. You spent a lot of time looking at these kind of things. When you look at the data, what does the American economy look like now?

STOCKMAN: I think it's very weak and I think we're not in any kind of conventional recovery. This isn't just a business cycle. I think we've been through a 30-year binge, if I can use that word, of massive debt creation, both in the public and the household sector.

We've had a Fed that's totally changed policy and has become very easy and run the printing press year after year, fueling this enormous current account deficit that we've had. We basically run $8 trillion worth of deficits with the rest of the world. That is, we're living beyond our means, by that extent, and it's cumulatively built up into all kinds of weaknesses in our economy.

And so today we're having a hard time recovering from the big recession that we went through over the last two years. And I think this is going to be par for the course, the new normal. Economic growth will be weak as we try to unwind this massive spree that we, unfortunately, indulged in and reduce the debt on the household sector and on the public sector at some point.

ZAKARIA: So you're talking about a number of years of fairly poor growth, probably much worse than the current projections? STOCKMAN: Yes. I think that's right, and we've never faced that before, because for 40 or 50 years, this baby boom generation has always believed that things will get better and better and they did, and that when we ran into recessions, that we could spend our way and borrow our way out of it. Well, we did three or four or five times.

But I think when we got to 2008, we were at the end of the road. We had $50 trillion of debt on the public and private sector combined in this economy. We had what would be called the leverage ratio that never before had been seen in history. Even during the great depression of the 1930s.

So we were at a break point, and - and as a result of that we're now in an environment where it may take 10 years of very little growth, of difficult struggle to rebalance our economy, and bring it back to sustainable health. So we're in a real bind, and I think the budget projections ignore that, and, therefore, they're way too optimistic.

ZAKARIA: The Fed and the White House and Congress are all projecting growth rates for next year and the year after that you think are essentially impossible to achieve.

STOCKMAN: Yes, they're projecting that soon, within a year or two, we'll be back up to three or four percent growth. Over the next five years the unemployment rate will come down from 10 or even more if you measure it correctly where it is today to five. That we'll create 13 million new jobs over the next five years or about 250,000 a month, when since the recession ended in June of 2009, we've barely created 50,000 a month.

So the prospect that that is likely to happen I think is quite remote, and so, therefore, if you recalculate the budget with a realistic level of unemployment, and, therefore, more unemployment spending, more food stamp costs, more safety net costs -

ZAKARIA: And fewer tax -

STOCKMAN: -- and less revenue, the budget deficit will be $100 billion a month as far as the eye can see, and our economy is growing at $50 billion a month at best. So we have a debt - a national debt that's growing at twice the rate of our economy, and we have total stalemate in the political process in Washington as we saw last week in response to the proposal, which I think is pretty constructive of the co-chairman. It was dead on arrival.

ZAKARIA: Explain that, because you are, you know, you're not just a policy wonk. You were a congressman.

STOCKMAN: Right.

ZAKARIA: You were a congressman from Michigan -

STOCKMAN: Right.

ZAKARIA: -- which is a tough place to be a congressman from. STOCKMAN: Sure. Well, we have gone now 30 years with each side sort of digging in to their favorite political zone of defense, so now we have the two parties dug in, no spending cuts from the Democratic side, no revenue increases, and, in fact, tax cuts from the Republican side and our system is broken. It is ungovernable fiscally. And at one point or another down the road, the world financial markets, the bond markets, the currency markets are going to figure this out. They're going to figure out that today this crazy QE2 that we have from the Fed is really a disguised form of monetization.

Each month the Fed is going to be buying $100 billion worth of new treasury debt. Each month the Treasury is going to be issuing $100 billion to fund this huge gap. Well that means that we're just printing money. We're literally printing money to pay the government's bills, and there's no case in history where that's worked for very long.

ZAKARIA: You say that you - you are as an investor will buy everything that Ben Bernanke cannot destroy.

STOCKMAN: Yes.

ZAKARIA: What do you mean? Explain.

STOCKMAN: I said I would buy gold. Maybe I would buy bottled water, canned beans, and some flashlight batteries. It was kind of a statement to say there's a lot of worry about this, and it's not entirely flippant.

I think the Federal Reserve is under attack from every corner of the globe, and it should be. From Ron Paul on the right, and he is right, to the Chinese communist leaders who learned their economics from the little red book, and even they can see that printing money in this reckless way, in this magnitude, in an economy where there's too much debt already and the interest rate is zero, what sense does that make?

ZAKARIA: So paint the scenario you worry about. Not - and not a worst case scenario, but a realistic scenario where presumably you feel at some point world markets, world investors will say, wait a minute, can we really rely on the United States to fulfill all these - all these obligations?

STOCKMAN: Yes. The worry I have is that we're drifting down the road to a global monetary conflagration, where this enormous flow of new dollars into the world market creates a huge reaction, and you're seeing it already. Brazil is denouncing it. You know, printing press money, the Chinese, the Germans. So we're running into a dead end here pretty quick.

And if a sell-off in the global U.S. government bond market ever gets underway, it will be, you know, traumatic. It will be a real Armageddon situation. There's $9 trillion out there of U.S. government bonds and bills and notes, and if the world market loses confidence and a sell-off begins, it will really be a traumatic moment. ZAKARIA: It will mean that the only way to maintain the system is that the United States - the Federal Reserve will have to raise interest rates very high, which will then choke off what little growth we had.

STOCKMAN: Exactly right. Exactly right. They're playing a very dangerous game at the Fed, and they're playing an even more dangerous game in Washington by pretending that, well, the economy is weak. Yes, it is, but it's going to stay weak, and, therefore, they're saying let's wait two years and do something.

Well, you know, when your credit card is taken away, you don't really tell the credit card company give me two years to see if I can find a couple more jobs so I can pay back my default. And this is where we are right now as a nation. We don't have two years to, you know, wait to see if the economy gets a little better before we start making the tough choices to cut spending, defense, social security, discretionary spending and raise taxes.

I think it's silly that they're - they're thinking about extending the tax cuts for the richest two percent of Americans in light of the circumstance that we're in. I'm just shocked that Obama wouldn't have the fortitude or wouldn't have the insight to realize he has to stare down Congress and say no, I'm drawing the line in the sand, send me a bill that extends tax cuts for billionaires and I will veto it, and, yet, what do you hear? Well, maybe we'll compromise and extend them for a couple of years.

Unless we get some leadership out of the White House, this situation is going to go from bad to worse very quickly.

ZAKARIA: We will be back right after this. When we come back, David Stockman will explain his solutions to some of these problems and the politics of it, why is it that his party, the Republican Party, is unwilling to do what it takes to get the economy back in shape, when we come back.

(END VIDEOTAPE)

(BEGIN VIDEO CLIP)

STOCKMAN: This isn't about growth. This is this isn't about Morning in America in 1980. This is about solvency. This is about cleaning up the mess the morning after from a 30-year binge that wasn't sustainable as we've learned.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

CANDY CROWLEY, CNN SENIOR POLITICAL CORRESPONDENT: I'm Candy Crowley, and here are today's top stories.

Breaking developments in the Korean peninsula crisis. China is calling for an emergency consultation with members of the six-party talks as the U.S. and South Korea conduct joint military exercises in the Yellow Sea. North Korea called those exercises a pretext for war and warns that any intrusion into the country's territorial waters will result in a, quote, "merciless military counter attack."

And preliminary reports indicate Americans shopped in larger numbers this Black Friday than last year, but spent only slightly more. The company ShopperTrak projects that total sales were up just three-tenths of one percent over last year.

And those are your top stories. Up next, much more "FAREED ZAKARIA, GPS," and then "RELIABLE SOURCES" at the top of the hour.

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

ZAKARIA: And we are back with David Stockman, Ronald Reagan's Budget Director, the architect of the Reagan tax cuts. We're going to talk about what to do now.

You say the only solution, logically, is you have to cut spending and raise taxes.

STOCKMAN: That's correct.

ZAKARIA: That simply that the hole is too large that you could - you can indulge in the fantasy that you just do one or the other, but part of what you want to do is you really feel very comfortable raising the taxes - raising taxes substantially on the rich because you feel that there has been a real divergence in the fate of - of Americans over the last 25 years.

STOCKMAN: Yes, because this wasn't a real solid, sustainable, productivity, technology-based prosperity. Much of this was a debt- fuelled money - easy money bubble. In fact, it was a serial bubble. First, the dot-com and then the housing and consumer credit and the ATM machine and everybody buying, you know - borrowing from their house in order to buy things they couldn't afford.

So all of this ended up, strangely enough, shifting wealth and income to the very top strata of our society in a way that we've never seen in history. Because it wasn't real, sustainable, mainstream economic growth and prosperity. One number that I think is shocking is that in 1985 the top five percent of households had $8 trillion of net worth. By the peak of this bubble in 2007 they had $40 trillion.

ZAKARIA: So from $8 to $40 trillion.

STOCKMAN: Eight to 40. Five fold in 25 years.

ZAKARIA: And the economy didn't -

STOCKMAN: A $30 trillion gain.

ZAKARIA: Right. And the economy didn't grow five fold.

STOCKMAN: The economy didn't grow five fold, and it was because of the bubble valuations of assets, stocks and bonds and real estate and all of the other speculative classes.

I'm saying that it is now so distorted that to get the economy back to health, we're going to have to reset some basic parameters of our economy, and one of them in this environment would be a higher tax burden on the upper income then a conservative, like myself, would ordinarily advocate.

But right now, this isn't about growth. This isn't about Morning in America in 1980. This is about solvency. This is about cleaning up the mess the morning after from a 30-year binge that wasn't sustainable as we've learned.

ZAKARIA: And one of the problems at the Republican Party, it seems to me, is, as you say, is tax cutting has become a kind of theology and so that when you - when you bring up the fact that if you do extend the Bush tax cuts or if you have further tax cuts, you will lose revenue. People say, no, no, no, that's not how it works. You know, if we cut taxes, we will get more revenue. Reagan did it, and they often point to the Reagan tax cuts.

STOCKMAN: Yes, and, unfortunately, that was one of the unfortunate legacies of the 1980s that I don't think was really intended. After 1985, the Republican Party adopted the idea that the tax cuts had solved the whole problem and that, therefore, in future deficits didn't matter and the tax cuts would always be the solution of first, second, and third resort.

And I think once that got embedded and a whole generation of new Republican congressmen and senators became drilled in that catechism and then became positioned politically on that proposition, it really led the party out into the wilderness.

And then when Dick Cheney, who should have known better, in the 2001 debate, I think it was, about the Bush - first Bush tax cut, it was totally not need. He said, well, Reagan proved that deficits don't matter. Reagan proved nothing of the kind, and, yet, that became the mantra and it just led the Republican Party away from its traditional sound money, you know, fiscal restraint principles that were really the heart of the Republican Party and its job in our system.

The Republican Party's job as the Conservative Party is to be the party that says no, the party of restraint, the party of fiscal responsibility. The others can be the party of, you know, dealing with social issues and so forth, and that's necessary as well. But when you have both parties playing the Santa Claus and you have no one willing to spend political capital on fiscal and financial restraint, we end up with the situation we had by 2008.

ZAKARIA: You're pretty critical of the bailouts themselves. You think that they did a lot of damage. I mean, Warren Buffett said we should thank the United States that it intervened, saved the system, but you are very concerned about it, and I say - and you say this as a Michigan congressman who voted against the Chrysler bailout.

STOCKMAN: The first one in 1979 and I think history proved that that was correct. I am strongly opposed to bailouts, but particularly bailouts of Wall Street. And the idea that Wall - that the government ought to be thanked as Mr. Buffett said last week, for the bailouts as just so much humbug.

The panic that occurred in September, 2008 was not in main street America. It wasn't businesses about ready to close their doors because they didn't have cash to meet payroll. That is all urban legend. It's mythology. The panic that was going on was in the fifth floor of the Treasury Building. It was in the Eccles Building where the Federal Reserve and Bernanke reside, and they created the panic. They stirred up Congress. They were so concerned about where the stock price of Morgan Stanley and Goldman was that they didn't look at the bigger picture.

If a couple more banks had gone under, they would have gone under. If the Golden stock had gone down to $10 and stayed there for a couple of years, it wouldn't have been the end of the world. But when we did that, that was the waterloo for fiscal policy because how can you ever tell a congressman from Alabama to cut cotton subsidies after you have bailed out every one of the major banks and not only bailed them out, but within a year they were back to a picture of rosy pink health and paying bonuses which they will this year of $144 billion, nearly the highest in history.

And I'll never forgive the Bush administration and Paulson for basically destroying the last vestige of fiscal responsibility that we had in the Republican Party. After that, I don't know how we ever make the tough choices.

ZAKARIA: David Stockman, pleasure to have you on.

STOCKMAN: Thank you.

ZAKARIA: We will be back.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

ZAKARIA: Our question this week from the "GPS Challenge" is "What did Russia's Vladimir Putin and China's Wen Jiabao meet in St. Petersburg to discuss this week?" Is it A) Nuclear proliferation; B) American hegemony; C) Tiger conservation; D) Currency cooperation? Stay tuned and we'll tell you the correct answer.

Make sure to go to CNN.com/GPS for 10 more questions.

While you're there, don't forget to check out our podcast. You can also subscribe to it on iTunes. That way you will never miss the show, and the price is, of course, zero.

The "Book of the Week" is "Bounce" by Matthew Syed. The author and former table tennis world champion looks at why people like him get to the top of their fields. Syed is now a columnist for "The London Times," and he says our obsession with talent rather than hard work has caused more harm than we imagine, leading to blow-outs like the collapse of Enron. He explains why athletes choke. He looks at whether blacks are better runners and much more.

As a parent, I was struck by the section on education. Syed says telling your kids you are so smart is actually detrimental to their education and development. And if you want to know why, read the book.

Now, for "The Last Look", every nation has its unique traditions that when viewed from outside might look a little odd. Here in the States, of course, it's the season where we kill a turkey and gorge upon it. In Afghanistan, it is the beginning of Buzkashi season. That's where they kill a goat or calf and race around on horses with the carcass. The object is to drop the dead animal in the circular goal.

It's a tradition that is said to go back hundreds or even thousands of years where there are no teams, only temporary alliances. There are no boundaries. Anywhere is fair game. And it is obviously a very tough game for Westerners to understand. Maybe America's generals should be playing this game.

The correct answer to our "GPS Challenge" question was, C) Tiger conservation. Putin and Wen met on how to save the world's tiger population, down from 100,000 a century ago to 3,200 today. Go to our website for more.

And thanks to all of you for being part of our program this week. I will see you next week. Stay tuned for "RELIABLE SOURCES."