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Fareed Zakaria GPS

Romney and the Republican Party; Paul Krugman vs. Ken Rogoff; Making Sense of Oil-enomics

Aired January 15, 2012 - 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 a terrific show we have in store for you today.

(BEGIN VIDEO CLIP)

ZAKARIA (voice-over): We begin with what is still the biggest most important story in the world - the economy. Two of the world's top economists, Paul Krugman and Ken Rogoff, with differing perspectives will tell us what they think will happen in America, Europe, the emerging markets in the year ahead.

After that, "Why in the World?" is the price of oil so high when the global economy is so troubled? We'll explain.

Next up, Iraq. The nation is on the brink of disaster, according to its former prime minister, Ayad Allawi. I will talk to him about Iraq's struggles.

And then, we'll ask two passionate participants whether the Iraq War was worth it. An important debate.

(END VIDEO CLIP)

ZAKARIA: But first, here's my take. Finally, it looks like former Massachusetts Governor Mitt Romney will win his party's nomination, so Republicans are following a familiar pattern.

(BEGIN VIDEOTAPE)

ZAKARIA (voice-over): They're nominating the mainstream candidate who's waited his turn, the guy who ran once before.

This is the party after all, that had a Bush or a Dole on its ticket for about 20 years. It's also a party that nominated Richard Nixon on its presidential ticket five times. Republicans don't like surprises.

But there is something surprising about this primary. It's the charges that are working against Romney. See, Romney's opponents have tried to change his upward trend at two levels. First, they called him a Massachusetts moderate, but that didn't seem to work. Not sure why, people perhaps think that Romney is more electable because he's moderate than his opponents once he gets to the general elections.

But a second line of attack does seem to be gaining traction, that of Romney as job killer, Romney as the private equity guy who buys companies, hollows them out and then outsources jobs.

UNIDENTIFIED MALE: A story of greed, playing the system for a quick buck.

(END VIDEOTAPE)

ZAKARIA: Now, it's striking that this attack is coming in a Republican presidential primary. After all, what Romney did while at Bain Capital was classic capitalist creative destruction. He took over businesses, tried to make them more productive. To do so, he often had to shed jobs. In other companies, start-ups like Staples, he created jobs.

Republicans should be celebrating Romney's work as an example of how the market functions - driving out inefficiency, generating productivity, creating a lean, mean capitalist machine. But something has changed in America. Even in the Republican Party there is a huge concern about what globalization and technological changes are doing to the average middle class American. There is a sense that the system is not working for the median American worker.

(BEGIN VIDEOTAPE)

ZAKARIA (voice-over): If you look at job creation over the last 20 years in America, you'll notice that we haven't been able to create any jobs in what is called the tradeable sector of the economy - those jobs that are subject to global competition. The jobs that we've created have almost entirely been in industries like health care, government, construction, which are basically local industries shielded from global competition. You can't outsource the building of a New York skyscraper to a Chinese worker. You can't outsource a nurse.

The other great force coursing through the economy, technology, has created new companies, but it's had a more mixed record in creating tens of thousands of new jobs. Note, this is not a partisan point. We've netted no new jobs in over 20 years. That's under Obama, under the Bush years with tax cuts, under Clinton with balanced budgets and deregulation.

Most Americans sense that we're in a new world. Romney's opponents are taking advantage of this anxiety in their attacks, but none of them really have answers to deal with this problem. Simply talking about cutting government spending isn't going to make the American worker more competitive in the face of these challenges from technology, from globalization.

Hopefully, during the general election, we'll have a real national debate about how to create jobs in America.

Now, before we get started, I have great news for you. GPS is back on iTunes. If you ever miss a - miss a show, just go to iTunes.com/Fareed and you can buy it; or subscribe and make sure you never miss one again.

OK? Let's get started.

(BEGIN VIDEOTAPE)

ZAKARIA: While much of the media and much of America was focused on primary voters in a tiny town in New Hampshire this week, everyone knows that the November elections won't be determined by those results. They will be determined by what happens in the American economy.

And to talk about that, I am joined by Paul Krugman of the "New York Times" and Princeton University; and Ken Rogoff of Harvard University.

Let me begin, Paul, by asking you about a column you wrote in which you talked about Mitt Romney and Bain Capital and the fact that he had - he had not created a lot of jobs. He had destroyed them.

It struck me that it was somewhat unfair because Bain Capital seems to be, of all the private equity companies, not one of these companies that loads on a lot of debt on its - on its - on the companies it takes. It often acts as an early stage investor, almost more like a venture capital company.

Steve Ratner, who was a, you know, Democrat, worked for Obama, says that actually if you look at Bain Capital's record, it's - it's quite remarkable. It's mostly about having spotted successful companies and steered them well. What do you - ?

PAUL KRUGMAN, COLUMNIST, THE NEW YORK TIMES: Well, I - you know, I think it was - what I actually did, I didn't - I said actually - it's actually wrong to think about Bain as having either created or destroyed jobs. On balance, it led to the destruction of relatively good jobs and replaced them with jobs that are worse.

No different. This is what private equity has done, to a large extent, in the U.S. economy. I don't - I don't think Bain stands out as an especially bad member of that industry, but that industry is - is doing stuff that is good for corporate bottom lines, but not terribly good for workers.

But the main point is that Romney is saying I should be president because I know how to create jobs, and he actually does know how to make a lot of money in private equity, which is not at all the same thing as creating jobs. It's not all the same thing as - as what's involved in - in running macroeconomic policy.

So the main point is not that he was an especially evil private equity investor. We don't think so. It was that that has basically zero relationship to - to what he would have to do as president. And it's an industry that is of a somewhat mixed - the industry has arguably not been one of the things that - whose overall impact has been positive on America.

ZAKARIA: Let's talk about the big issue, which is going forward what the economy is going to look like and what the debate is going to be. Paul, you had a column and a very striking graph where you point out that if you would ask yourself what has the market told us over the last three years, you know, the market's verdict has been that the United States, which engaged in a big stimulus program, and then the fed did quantitative easing and quantitative easing two, has found that its borrowing costs have just fallen and fallen and fallen.

KRUGMAN: That's right. People are actually willing to basically pay the U.S. government to keep their money safe, which suggests that the market, at any rate, is not at all worried about U.S. solvency. It would suggest that even leaving aside the whole question of multipliers and whether you can create lots of jobs, this would be a really good time to be doing a lot of public investment because you can borrow the money for zero or actually negative cost.

So it's - it's a pretty spectacular contrast with the rhetoric in Washington. Listening to the discussion in Washington, you'd think that we're on the verge of a - of a debt crisis; that we have an intolerable, crippling deficit. But the market, people are actually putting money on the line and they're saying actually, you know, we're not worried about that, and we can't see any better use for our money. So, here, please take it.

ZAKARIA: Ken, what do you say to that? Because it is now three years. It's not a few months. It's - and the trend is pretty consistent and you can't say that this is like subprime or something that people didn't know about.

This is all we've been talking about for three years, and yet the interest rate keeps dropping. In other words, the market is saying, you know, we're not worried about - about an American debt crisis. What we're worried about is very slow growth in the United States. Correct?

KENNETH ROGOFF, PROFESSOR, HARVARD UNIVERSITY: Well, I mean, for one thing, interest rates are not an incredibly great predictor of what's going to happen in the future. Iceland was borrowing at very low interest rates in 2006. You can point to lots of others. This has been studied a lot, and it's hard to find evidence that they really can predict what's going on.

And, of course, debt levels are surging, not just in the United States but across the advanced countries. And I think it's really important not just to look at public debt, but to look at the total picture on debt, which just looks like nothing we've ever had before. We're already at general government debt above World War II, but if you throw in private debt - which often becomes public debt. We're very familiar with that.

I mean, I don't think it's nuts to be worried about debt and to just point at the interest rates and say, well, this isn't a concern. I think it's too easy.

KRUGMAN: If I can - first of all, I - I think that the - the relevant thing here, at least what I've been doing, is looking a lot at Japan, which is - Japan in the '90s was kind of a dress rehearsal for us now, and Japan has been subject to people warning of an imminent debt crisis for a long time now. I mean, S&P downgraded them in 2002, and nothing happened, which is what - why some of us successfully predicted that when S&P downgraded America nothing would happen.

Of course, there are risks. There might be something that we don't know. It may be that although Japan was able to get up to gross debt of 200 percent of GDP now and still borrowing at an interest rate of less than one percent, maybe the United States would be different from that. But that's a potential danger that we're - is not apparently weighing very heavily right now.

And the fact is, meanwhile, we have massive unemployment. We have - it - you know, how heavily do you weigh something that might happen, but that history kind of suggests probably won't happen very soon against something that is - against the clear and present damage that's being done by a weak economy?

ZAKARIA: When we come back, we're going to continue with this. I want to ask two things. One is what you think your best prescription would be for the president, but also, the U.S. economy is going to be determined by something outside the U.S., which is Europe. And Paul Krugman and Ken Rogoff are going to solve the European crisis when we get back.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

ZAKARIA: And we are back with economists Paul Krugman and Ken Rogoff.

So your prescription to President Obama, I take it, is run on investment, run on the idea that you're going to - you're going to borrow more, spend more, that that is what the economy needs right now, not worries about - of the deficits.

KRUGMAN: Yes, and I think in a way we may - we may be approaching a somewhat advantageous position for that, even - I mean, it would have been the right thing to do all along, but there are signs that private demand is starting to get some traction.

You know, for one thing we've had - our housing bust has gone on so long, that we actually appear to be under housed. We actually are kind of short on units. People can't afford them because there's - there's no jobs, but if we had higher employment, you could imagine a self reinforcing cycle of growth kicking in.

But it won't happen if the government is pulling back, if we're actually pursuing austerity and thwarting any recovery, whereas right now is about the time - or next year, when a push could be the thing that tips us into - into a self-sustaining recovery.

ZAKARIA: What would advise Mitt Romney? I don't know if you are advising him, but what would -

ROGOFF: I'm not.

ZAKARIA: -- what would you advise him to run on? What would be the - the kind of right of center platform?

ROGOFF: The right of center platform. I mean, I actually agree on the point of doing infrastructure spending, but the question - I don't think it's just about increasing aggregate demand, which I'm much less impressed by that argument because this has gone on so long. Why hasn't the market cleared? I - I believe in Keynesianism for a year, two years. This has been a long time.

And I think infrastructure spending would be good, education, but you want to do it well. There need to be new ideas.

I mean, I'm - I'm not saying President Obama hasn't offered them too, both sides. I mean, we need to do infrastructure spending that gets infrastructure built at a reasonable price. Someplace we need to go, something we need to do.

If we're going to spend money on education, it can't just be, you know, paying more to get the same thing done. There's a lot of ideas out there, and I feel it's been a very static debate, and it's, you know, paralysis in Washington, but there are things we need to move forward on running things better than we do.

ZAKARIA: How do you create jobs in the - in the tradeable sector? In other words, yes, you know, everything people talk about sounds to me like infrastructure jobs, construction jobs, health care is going to go up no matter what we do, maybe some government workers. But the thing that the American economy used to at least legendarily produced lots of, you know, these powerhouse manufacturing service jobs, high paying jobs, you know, that - that is where the trend has gone down for 20 years and how do you revive that?

ROGOFF: I don't think we will on manufacturing. I mean, agriculture used to be, you know, more than half of the people worked in agriculture. Now it's a couple of percent. Manufacturing is trending down I think for similar reasons.

There are exports jobs in service industries where we have the rule of law, information, technology, things like that, where I think our - our future lies, but I - I just - the world has changed.

ZAKARIA: So let's talk now about the place that can - that can throw all this in turmoil - Europe. In the European case, Paul, I take it you - I mean, I understand that the argument that people now are understanding that you can't just have savage austerity programs and - and expect everything to bounce back because these economies go into - go into downward spirals.

But in - it seems like in many of those countries, they were having difficulty borrowing, and if they don't do something to convince the markets that they're getting their fiscal house in order, their borrowing costs will go to seven, eight, nine percent. So are they in just some kind of Catch 22 that they can't get out of?

KRUGMAN: They're - yes, it's actually worth noting that essentially nobody has managed to regain the confidence of the markets, except for, you know, Latvia, which had almost no debt. Even the most savage austerity programs are not actually getting confidence back.

I think the answer to this is that the - that the debtor countries in Europe cannot solve this on their own. If it's only about - if the only policy in Europe is austerity in Southern Europe, then that's - that's just a losing proposition. They're going to depress their economy enormously. They're not even going to do as much about reducing their budget deficits as they want because the economies are depressed and so are - is tax revenue.

ROGOFF: And it's not going work.

KRUGMAN: It's not going to work. So they need help, and the only way you can save the euro is for there to be expansionary policies at the Europe-wide level, and, in fact, some inflation of the European-wide level that makes this a tolerable adjustment.

ZAKARIA: Which means the European Central Bank should do what the Fed did, which is some kind of massive quantitative easing?

KRUGMAN: Yes. And in fact Europe almost surely, because it's different countries and there are these adjustment problems, they almost surely need a higher rate of inflation than we do. We can manage probably with two or three percent. They probably need three or four at least to make this workable.

ZAKARIA: Would you agree with that?

ROGOFF: Actually, I do on the inflation. I think it would be helpful here. I think it would be very helpful there. The Germans don't want it.

A difference between Europe quantitative easing, which means buying government debt, it's more like we're buying California debt and Illinois debt. It's very political. It's complicated.

They are running this union without a real constitution. It's as if we lived with the articles of confederation, and we were trying to run our government with that, and they need to fix that. I mean, they're pouring water into a leaky bucket here. You need to fix that, and probably I think a couple of the countries at least probably need to go on sabbatical from the euro because they're just not competitive.

I don't think it can work within their framework or anything close to it.

ZAKARIA: You know, when I'd look historically at countries that get into this problem, it seems like the only thing that seems to work is you get your labor more competitive -

ROGOFF: Absolutely.

ZAKARIA: -- and you - and you depreciate your currency, which is -

(CROSSTALK)

ROGOFF: -- a big piece of what works.

ZAKARIA: Paul has this great chart about, again, the - what don't you explain it? It's basically how rates went down, and its default countries. It looks at U.S., Japan, U.K. and Sweden. All have control over their own currency and in effect have printing presses.

The red -

KRUGMAN: The one I find that's really amazing is Denmark, which is actually has lower borrowing costs than Finland, even though they look equivalent. Denmark has its own currency. It's actually pegged to the euro. They're not - given themselves (INAUDIBLE) flexibility. But everybody knows that they have those printing presses if they need them.

ZAKARIA: Right.

KRUGMAN: So that makes an enormous difference.

ZAKARIA: If Italy had its own printing press right now, meaning it had its own currency and its own central bank, nobody would worry about Italian debt because they had not - at the end of the day -

KRUGMAN: That's hardly true. I think we used to worry about Italian debt back in the days when they had their own currency, but it would be very different. They'd be able to get the 20 percent devaluation of the lira.

ZAKARIA: Right.

KRUGMAN: Their labor cost would be in line (ph), they would not be subject to these kinds of speculative attacks by people who think that - basically the people who were selling Italian debt because they're afraid that other people might sell Italian debt. (INAUDIBLE) position to do it.

ROGOFF: I mean, the common currency is a little bit like a couple and they're living together, not quite sure if they want to get married. So let's try out having a checking account together instead of, you know, that coming next.

And that's basically what they've done, except it's not just a couple. It's 17, involving first cousins, second cousins, third cousins, and it just is not a workable system, and I think that's what people see.

ZAKARIA: On a scale - on a, you know, probability basis, how likely is it that the euro blows up? This year you have $1 trillion of European debt that has to be rolled over this year.

ROGOFF: I think it's not this year that it's going to happen. They're finding ways basically by having the European Central Bank buy everything to push it out into something bigger and worse down the road, raising interest rates, raising problems.

But they have the capacity to have the European Central Bank buy stock, and if that's happening, indirectly it's buying the debt. That can go on for a while. I think it will not be decisive in our election.

ZAKARIA: Probability for a blow up over all this -

KRUGMAN: I don't think there would be a blowup in Europe this year, but there will be a recession, and that will, in fact, hurt us. So it is going to be a drag on the U.S. economy.

So, you know, it may not be enough. There are - there is some sign of developing strength in the U.S. economy, but there's going to be - I think it's going to be a fairly nasty recession in Europe. I think people who think it's going to be short and shallow are wrong because why - why would it be?

But, yes, I think the big blow up - I'm not sure the big blow up will ever happen because in the end, you know, the prospect of hanging concentrates the mind. The prospect of a collapse of their greatest initiative ever may make the Europeans do what needs to be done eventually, but not before they absolutely have to.

ZAKARIA: On that note, Paul Krugman, Ken Rogoff, thank you very much.

Coming up next, a curious economic problem that impacts your bank balance. When demand drops and supply stays constant, prices should fall, right? But oil prices are soaring. "What in the World?" is going on, next.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

ZAKARIA: The next time you pay $3.50 for a gallon of gas, stop and think about a basic rule of economics. When demand is low is and supply is strong, prices should fall, right? Now, apply that to oil. People drive less in the winter. The American economy is slow. The Eurozone has stalled. China and India are slowing down. So demand for oil worldwide is low.

So why is oil trading at $113 a barrel, more than twice the price it was trading at five years ago when the global economy was booming. "What in the World?" is going on?

(BEGIN VIDEOTAPE)

ZAKARIA (voice-over): There's a school of thought that suggests the global economy is doing better than we think. China and the U.S. are proving resilient to Europe's problems, and so traders are expecting renewed demand in the world's two top economies.

But another school of thought argues we're in the midst of a bubble. Speculators have been driving up the price of oil and eventually it will crash.

Now, I think that the economic fundamentals really can't justify oil prices at their current levels. The real driver of high oil is not the stuff you find in the business section of the newspaper - the demand for oil in India or China. It's on the front pages, global politics. You see, traders worry about risk, and the biggest risk to oil supplies is the threat of war in the Persian Gulf.

Meanwhile, in Nigeria mass protests are raising worries about the supply of fuel from there. Venezuela is in a slow motion collapse because of Hugo Chavez's mismanagement. There have also been protests in Russia, the world's top oil producer.

And, remember, the fallout of the Arab spring, Libya's oil production in 2011 was severely curtailed. Iraq continues to disappoint with its oil output, and its recent political tensions certainly haven't made things any better.

So a mix of war rhetoric and local troubles in key oil states are factors driving up the price of crude and that translates to higher prices at the pump. Now, that logic suggests that prices will fall when the news calms down, maybe from Iran and from Russia, but perhaps not. Perhaps oil producers want these sky-high prices.

Usually the major oil producers understand that keeping prices too high in the short-term means people start finding alternatives to oil. They start driving more efficiently, they start looking for alternative energies. But this time oil states face crucial challenges.

Look closer at the Arab spring. The only oil-rich country that has been forced into regime change is Libya. Why? The Gulf state's lavish subsidies and salary increase on their citizens. They've upped spending to record levels to suppress any popular discontent.

I saw some striking numbers this week. Look at the breakeven costs for the world's top oil producers. That is the minimum price at which these countries need to sell oil so that they can balance their budgets. Russia now needs oil at $110 a barrel to manage its finances. For Iraq the number is $100.

Even Saudi Arabia now needs oil to trade around $80 a barrel just to balance its budgets. The numbers are also high for Algeria, Qatar, Oman.

Only a decade ago, Saudi Arabia was able to balance its budget with oil prices averaging around $25 a barrel. So now it is in these countries' interests to keep oil prices high, which they do by curtailing supply in one way or the other.

This is perhaps the most lasting impact of the year of global protest - high oil prices. (END VIDEOTAPE)

ZAKARIA: So, bottom line, an oil crash seems unlikely. Even though the engines of global growth are sputtering, be prepared for a period of expensive commutes. Maybe it's time to trade in your SUV for a Prius.

And we'll be right back.

(COMMERCIAL BREAK)

CANDY CROWLEY, CNN CHIEF POLITICAL CORRESPONDENT: Now time for a check of today's top stories.

The captain of the ill-fated Italian cruise ship defended his handling of the situation after the ship hits submerged rock Friday evening saying they were not marked on his map. Meanwhile, an Italian prosecutor told reporters this morning that authorities have ordered the black boxes from the ship to be seized. They expect to complete their analysis in the next few days. At least three people are dead and 17 others still missing.

And at least nine people were killed and 26 others wounded today in bombings targeting police stations in Iraq. Iraqi police say an area near the predominantly Sunni City of Ramadi was the scene of a series of attacks involving a car bomb explosion followed by a raid by gunmen. The attack on the police station was one of several bombings in the area today.

The head of the United Nations is telling Syria's president to stop killing his own people. The demand from Ban Ki-moon comes as the fact-finding mission nears its conclusion. More than 5,000 people have died since Syria's anti-government uprising began last year.

A Russian tanker carrying much needed fuel has an Alaskan town trapped by ice. The U.S. Coast Guard the ice breaker Cutter Healy accompanied the tanker Renda as it traveled through frozen waters to the town of Nome. The Russian tanker is delivering fuel because ice formed over the Bering Sea after a November storm prevented fuel delivery to Nome.

And those are your top stories. Now back to FAREED ZAKARIA GPS.

(BEGIN VIDEOTAPE)

ZAKARIA: Less than one month after the last U.S. troops left Iraq, its leaders are fighting along sectarian lines, and there has been a spate of deadly bombings across the country. Iraq is in turmoil. In fact, my next guest says it is on the brink of disaster, and he would know.

Ayad Allawi has served as interim Prime Minister of Iraq. He's now the leader of one of the main Iraqi political parties. Allawi is part of the majority Shia community, but he is a rare secular figure in Iraqi politics. He joins me now from Baghdad.

Ayad Allawi, pleasure to have you on.

AYAD ALLAWI, FORMER INTERIM PRIME MINISTER OF IRAQ: Thank you.

ZAKARIA: Let me start with a question that is not directly related to Iraq. When you were prime minister, you had to deal with Iran and so you have some sense of that government. Do you understand what is happening in Iran right now? Do you feel that there is a real danger of some kind of confrontation with the United States? Would they shut down the Straits of Hormuz?

ALLAWI: I don't think they'll go that far. However, they are using this as a rhetoric, but Iran needs to change its attitude. It needs to change its performance in the region, I think. They should be less threatening. They should reconsider their policies.

Otherwise, what Iran is doing can lead also to greater risk in the region.

ZAKARIA: Tell me about Iran's influence in Iraq. There are many people who believe that the Iranian regime retains a great deal of influence. You know, the two main Shia political parties, the prime minister's party and the other one, are both - were both heavily influenced by Iran, have received funding.

Does Iran - is Iran playing an increasing role in the politics of Iraq?

ALLAWI: Definitely we can see this very clearly. We have seen it after the elections immediately when Iran used its influence and dictated what kind of government there should be in Iraq. They put a red line against me and against the Iraqi - and unfortunately, the United States went along with what Iran desired, and we want them - this interference in Iraq's affairs, is going to lead the country, Iraq, to larger and more significant problems in the future. And this is what's happening now.

ZAKARIA: How is the domestic situation in Iraq going to - going to end up? The prime minister is trying to arrest the vice president. The vice president has fled to the Turkish - to the Kurdish areas. How will things resolve?

ALLAWI: Well, let me tell you frankly, there are lots of problems now. The whole situation is very tense. Sectarianism is coming back and forth in this country.

I think that Iraq is passing through the most dangerous phase through its history now, and I have warned in the very early days - in fact, years ago that sectarianism and having a vacuum and having a political process, which is not inclusive, can only destroy the - the future of this country, and we needed and still need an inclusive political process and full blown institutions in this country. Unfortunately, both do not exist.

President Obama said very clearly that the United States have left Iraq as a stable and democratic country. It's neither stable nor democratic, frankly speaking. It's very - the terrorists are hitting again very severely. Al Qaeda is fully operational now in Iraq. We can see with the various explosions that are claiming the lives of innocent people every day, and we are seeing the unconstitutional behavior of the government.

ZAKARIA: Do you - do you want us back? Do you think there is a scenario in which the United States can return to Iraq in some - with some military presence? ALLAWI: It's (INAUDIBLE), the United States, frankly, still have a lot of leverage on Iraq. It still has a lot of goodwill, and the United States have political as well as moral responsibility to help this country to pass through this very difficult phase.

And as part of the world leadership, the United States must do something to help Iraq. I am not asking for the American forces to come back, but for the United States to use its diplomatic and other channels through the strategic agreement between the United States and Iraq to try and bring about sanity to the political process and inclusivity.

And I think there should be frank and real discussions with the prime minister between him and between the administration to make it very clear that what is happening in Iraq is not acceptable and there should be a way forward by getting inclusivity to the political process and by adhering to the constitution and respecting the constitution.

ZAKARIA: Ayad Allawi, thank you so much for joining us. Always a pleasure.

Up next, was the war in Iraq worth it for America? We have a debate. Stay with us.

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

ZAKARIA: We're back to talk more about Iraq. Nearly a decade on what has America accomplished. Was the war worth it?

Joining me now, Max Boot, a military historian, a senior fellow on the Council of Foreign Relations and sometimes advisor to General Petraeus. And Peter Galbraith has had a long career in diplomacy and has written two books on Iraq, including "The End of Iraq: How American Incompetence Created a War Without End."

Welcome.

So Max, looking at it historically, I know you are a passionate advocate of the war. You were a passionate supporter of General Petraeus, but you look back.

MAX BOOT, SENIOR FELLOW FOR NATIONAL SECURITY STUDIES, COUNCIL ON FOREIGN RELATIONS: And also critical the way it was conducted for the first few years, I might add.

ZAKARIA: Yes. But when you look back, though, $1 trillion, however many Iraqi lives, 4,000 American lives. What did we gain?

BOOT: I think we gained an opportunity, but whether we will, in fact, take advantage of that opportunity remains to be seen, and on current events I would say no. There's no question that the cost of the war has been high in both blood and treasure, but that's been true of many other wars.

In our history, look at, for example, the Korean War, you could have said in the 1950s what did we gain out of the Korean War, a divided peninsula, 38,000 dead, huge costs? But today, South Korea is a paragon of democracy. It's the 10th wealthiest country in the world.

And so the outcome looks a lot better than it did 50 years ago. If Iraq were to develop -

ZAKARIA: But the South Korean, just to keep the analogy -

BOOT: Yes.

ZAKARIA: -- we always had a South Korean ally that desperately wanted the United States over which we had enormous influence, that modeled its, you know - that it took enormous amounts of advice, aid, and assistance from.

The Iraqi government on the other hand is openly anti-American. Has asked the American troops to leave. Refused to have - that its parliament refused to pass the normal status of operating forces agreement that would have allowed the U.S. to stay, and much of Iraqi politics is conducted on a kind of anti-American basis, so where is the analogy?

The problem is that we didn't - we don't have a South Korea. Not as South Korea circa 2011, but a South Korea circa 1953.

BOOT: Well, I think that's an over simplification. I mean, even in the case of South Korea, there was a lot of anti-American sentiment. But if you look at Iraq, and, yes, there's no question there's anti-American sentiment, and sometimes for good reason, because they blame us for overthrowing the previous regime and not imposing law and order, which is a legitimate charge, but I think there is also widespread recognition in Iraqi politics that they need us.

ZAKARIA: Peter, how would you answer the question from 30,000 feet?

PETER GALBRAITH, PH.D., FORMER U.S. AMBASSADOR TO CROATIA, FORMER DEPUTY UN ENVOY TO AFGHANISTAN: Well, from the point of view of Iraq, I think actually the country has - is better off. After all, 60 percent of Iraq's people are Shiites. They were brutally repressed from the founding of Iraq until the day that Saddam Hussein was overthrown. Today, they now run Iraq. They are not pro-American. In fact, Baghdad is now Tehran's closest ally in the world, but that really reflects what the Shiite population wants. And another 20 percent of Iraq's population are Kurds.

They have dreamed from the founding of Iraq to the present moment of having their own independent state. And today they basically do. They have their own parliament, their own army, their own judicial system.

ZAKARIA: (INAUDIBLE).

GALBRAITH: You don't need a visa to go to Kurdistan, but you do to go to Iraq. It is an - except for having a flag at the U.N., it's an independent country, so they're delighted.

Of course, they were also spared almost all the violence. It's a small segment of the Iraqi population. The Sunnis and even only part of them that are worse off.

But the question is for the United States, was this worth $1 trillion? Four thousand dead and many thousands more permanently injured. To do what? To go into Iraq and to leave a situation where we have a government in Baghdad that has s closely allied with our number one adversary in the world, Iran?

We also did great damage to the prestige of the United States, to have argued that we had to combat - we had to invade because of Iraqi WMD, and then non-existent. The incompetence of the occupation, particularly in the early period. The spectacle of the United States standing aside as Baghdad was looted.

All these things damaged America's standing in the world, and, you know, these resources. The resources - the trillion dollars has added to the national debt. They're also national security resources that might have been - we might have devoted to other problems.

ZAKARIA: How would you respond to this issue of the time, the distraction, the mind share of the American foreign policy establishment, the resources were all devoted to Iraq for a decade?

BOOT: Well, there's no question that we - we took our eye off the ball in some areas, including Afghanistan, but I would argue that as a great power, we should have the ability to operate in more than one theater at once, and I don't think there is anything necessarily inevitable about the dire outcome in the early years in Iraq. Certainly, we went into the war based on a misapprehension about Saddam having WMD, which was a lie that he fed to his own people and to the world to try to enhance his aura of power. That backfired against him.

And then we initially had tremendous success which turned into a catastrophic failure because we did not send enough troops to stabilize the situation and impose the kind of near term regency that we did in places like Bosnia and Kosovo. That was a huge mistake. And I think the Bush administration deserves blame for making that mistake, and then not realizing the errors of its ways until 2007.

But then in 2007, we did change policy. We did implement the surge. Violence plunged more than 90 percent, and Iraq has since then has had a semi-functioning democracy, but now of course what's happened since then is in the last few months, since the withdrawal of American forces, the political process is once again screeching to a halt, and that's the great danger here is that I think we have made tremendous progress since 2007.

We have created the opportunity to create a functioning democracy in the middle of the Middle East and one that I don't think is necessarily a cat's paw, the Iranians, but now we're losing that opportunity because we're losing influence by taking our troops out. In fact, we are handing Iraq to the Iranians and we are making it much more likely that democracy will cease to function.

ZAKARIA: Let me press you on the Iran issue because it isn't really that - that clear that the Iraqi government is Tehran's closest ally. They've been somewhat accommodating on the Syrian issue, but other than that, the Iranians ask for kind of the most favored trade status. They didn't get it. They've maintained pretty close relationships with the United States. The Iranians haven't gotten any special deals on oil.

I mean, will national interest and national rivalries insure that Iraq has a healthy degree of - I mean, after all, most Iraqis remember Iran as a country they fought an eight-year war with.

GALBRAITH: Well, the Iran-Iraq War, you know, was something in which you had a Sunni dictator and Sunni general sending Shiite foot soldiers to fight. But when the elections were held in Iraq in 2005, the first free elections - and they were very much free elections. The Shiites in Iraq voted almost unanimously for the two political parties that were supported by Iran. Dawa and the Supreme Council for the Islamic Revolutionary Iraq which was founded in Iran, and they are - there are very close ties.

Look at the proposed sale of F-16 aircraft to Iraq. Iran doesn't object. In fact, I think they're delighted. They might even get access to the technology. Turkey doesn't object. The Kuwaitis I think are quite scared, but they aren't saying anything.

The people who are really concerned and speaking out are the Kurds, Iraqis. Because they are afraid, given the history of that country, that the weapons will be used against them, and I suspect the Sunnis are also quite nervous about it.

ZAKARIA: And we have to close on that. Max Boot, Peter Galbraith, thank you very much.

And we will be back.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

ZAKARIA: Today we'll take a trip to Italy for our question from the "GPS Challenge." The question is according to a report released by an Italian business group this week, which of the following is now the biggest bank and the biggest lender in Italy?

Is it, A) The Vatican; B) The Mafia; C) Silvio Berlusconi; or, D) The coins in the Trevi Fountain?

Stay tuned and we'll tell you the correct answer. Go to CNN.com/Fareed for 10 more questions. While you're there, check out the rest of the offerings on our Global Public Square website. There's always fresh content, insight, and analysis on what's going on in the world. Don't forget, can you follow us on Twitter and Facebook.

By the way, on that front, I have a very exciting announcement. If you ever miss a show, you can now find full video episodes of "GPS" for sale on the iTunes TV Store. Go directly there by typing iTunes.com/Fareed into your browser. You can get them individually or you can subscribe and get 10 shows in a row for less than $1 a show.

This week's "Book of the Week" was written by Max Boot, my guest from earlier, and whether you agree with him or not on Iraq, his book "War Made New" technology, warfare, and the course of history is worth your time.

It's a sweeping look at how the West has been so successful in warfare over the past 500 years, but also points out how technology has really been at the heart of so many important turning points and turning trends in history.

And now for "The Last Look." Now, this is certainly not my idea of fun, but the South Korean soldiers sure seem to be smiling as they frolic half naked in the snow. Just letting off some steam after the ratcheting up of tensions with their neighbors to the north? No.

These Special Forces soldiers are actually preparing for war with North Korea. About 250 of them this week were embroiled in these tests of raw endurance to prove themselves in war-like conditions. Half naked soldiers did push-ups, skied with their rifles, and took a dip in icy cold water, all to test their physical and spiritual abilities.

Not to be outdone, female members of the Special Forces also joined in on the military exercises, but they got to keep their clothes on and presumably stay a little warmer.

The correct answer to our "GPS Challenge" question is, B, the Mafia is the king of banking in Italy, said to be making over $200 billion in profits a year on loans of $83 billion. You see, family businesses can still thrive in the era of Big Box stores.

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