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State of the Union

Interview With Mitch McConnell; Interview With Chuck Schumer; Interview With Gene Sperling; Interview With Mark Zandi; Interview With Tim Pawlenty

Aired July 31, 2011 - 09:00   ET

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

GLORIA BORGER, GUEST HOST: It's down to the wire, and a deal on the debt ceiling could be near. Today as negotiations with the White House continue, we're with three of the key players, the man who could cut the final deal, leader of the Senate Republicans, Mitch McConnell, the Democrat's chief message maker, Senator Chuck Schumer, and the president's lead economic adviser Gene Sperling.

Then Moody's chief economist Mark Zandi to tell us whether a deal with save the U.S. credit rating.

And finally some presidential politics.

Candy Crowley in Iowa with candidate Tim Pawlenty.

(BEGIN VIDEO CLIP)

TIM PAWLENTY, REPUBLICAN PRESIDENTIAL CANDIDATE: You can be both strong and pleasant and nice. Those are not contradictory things.

(END VIDEO CLIP)

BORGER: I am Gloria Borger in for Candy Crowley, and this is State of the Union.

The Senate Republican leader Mitch McConnell yesterday demanded that President Obama get personally involved in the debt talks and he soon got his wish, and now there are reports this morning a plan is near. So joining me now Senator Mitch McConnell, thanks so much for being with us.

Let me get right to it, can you announce this morning that a plan has been reached and there's a deal?

MCCONNELL: Well, we are very close. We had a very good day yesterday, both the president and the vice president called me and the president talked to the speaker as well, and they understand that with a Republican majority in the House and a very robust Republican minority in the Senate we have to come together. And I think we've made dramatic progress in that direction since April, for example, when the administration, Gloria, was asking us to raise the debt ceiling with no spending reductions at all, nothing, just a clean debt ceiling. Now I think I can pretty confidently say that this debt ceiling increase will avoid default, which is important for everybody in America to know, we are not going to have a default for the first time in our 235 year history. We're not going to have job-killing tax increases in it. We are going to deal with the problem the American people sent us here to deal with, which is that the government has been spending too much.

We don't think we have this problem because we've been taxing too little, we've been spending too much.

So I think we're very close to being in a position where hopefully I can recommend to my members they take a serious look at it and support it.

BORGER: And get it done when?

MCCONNELL: Soon.

BORGER: Today?

MCCONNELL: Soon.

BORGER: OK.

MCCONNELL: We're aware that August 2nd is a date of some significance.

BORGER: Right. Well, let me walk you through an outline of this potential deal. There has been an awful lot of reporting from CNN and elsewhere about what it contains. First the size of the package, over $2 trillion, yes?

MCCONNELL: The entire package?

BORGER: The entire package, $2.4 trillion...

BORGER: What we're looking at is a $3 trillion package, a combination of discretionary cuts, both cuts now, caps over the next ten years to hold spending in line, and then we're also going to be voting on a constitutional amendment to balance the budget. Now that is important for the future, because it will put some constraints on our spending habits here in Washington.

Also, let me emphasize the joint committee. In the early stages of this discussion, the press was talking about another commission. This is not a commission, this is a powerful joint committee with a equal number of Republicans and senate -- equal number of Republicans and Democrats, to not only look at entitlement changes, but to make a recommendation back to the Senate and House by Thanksgiving this year for an up or down vote.

So think of the base closing legislation that we passed a few years ago for an up or down vote in the House and Senate.

BORGER: OK. Well, let me walk you through this in stages. And I want to get to that deficit commission, because there are discussions about committee. There are discussions about what would happen if it doesn't do its work. Let's -- first things first, though.

MCCONNELL: Yeah.

BORGER: One sticking point has been that the president wanted an absolute guarantee that we wouldn't go through this kind of a showdown six months from now on the debt ceiling, has he gotten his wish on that? Is there a way for the debt ceiling to come up in six months and he gets guaranteed approval of it?

MCCONNELL: Well, you know, the president has been pretty candid that he was concerned about not having to do this again before his election. Frankly, my members were a little more concerned about getting the job done properly for the American people...

BORGER: OK, but what is the deal? What is the fix?

MCCONNELL: Well, you will see that this is a process that could get him past the election. We're working on the combinations that will get us there.

BORGER: Would it be a vote of disapproval. In other words, he could just propose it and it would need a super majority to disapprove?

MCCONNELL: Well, the mechanism for getting a debt ceiling to be increased obviously would be the resolution disapproval. But look, we're still working on the parameters of it. We're very, very close to being able to recommend, I am to my members, that this is something they ought be able to support.

BORGER: So essentially then the president gets the ability not to have another showdown?

MCCONNELL: I'm very close to being able to recommend to my members that we have an agreement here that I'll be able to consider supporting.

BORGER: OK. And then the next big area is this debt committee, as you call it, and the question is how do they guarantee absolutely that you get the kind of deficit reduction you are looking for. Because we have had, with all due respect, committees in the past and they haven't done so well, one very recently. So how do you hold their feet to the fire? There is talk of triggers to make sure if they do not do their work congress will be forced to cut.

MCCONNELL: First of all, we haven't had anything like this before. This is a joint committee of congress. It is not a commission that consists of outsiders. A joint committee of congress with an equal number of Republicans and Democrats, under enormous pressure from the American people, from the markets, foreign countries looking at us to see if we're going to get our house in order, to come up with significant additional savings over and above the initial ones that we will approve before the end of this year, and entitlement reform is absolutely critical.

For example, the -- the trustees of the Medicare and Social Security system appointed by the president has said repeatedly, both of these very important and essential programs are in serious trouble.

BORGER: Well, so -- well, my reporting is, and I would like you to talk about what's going on inside the room you are in...

MCCONNELL: No, I know you'd like for me to do that.

BORGER: I would. I would ask the question of how do you absolutely guarantee that these cuts come? And as I was saying, there are these triggers people are talking about so that if, for example, they can't agree, let's just say that, then there is talk of across the board spending cuts, of as much as 4 percent in areas like Medicare and defense spending. Can you talk about these sort of fail- safe mechanisms that would enforce cuts?

MCCONNELL: Well, let me say my view is that there is a mathematical possibility, obviously, that the committee could deadlock, a mathematical possibility. And there has been a lot of discussion with the White House, you are having one of their folks on -- Gene Sperling I think later to talk about. A lot of discussions over the last week about what do you do if the committee deadlocks. I think it's highly unlikely that will happen. And that has been something we've been discussing for over a week. And I hope we're on a path to resolving the what if?

BORGER: What if?

MCCONNELL: We'll let you know.

BORGER: Well, I'm going to try again.

Because the big concern of the Democrats like Gene Sperling, have been that if the committee dead locks, and you have to come up with these deficit reduction, they want to see a balance. They want to see revenues and spending cuts. Is there a way you can guarantee that revenues would be part of any kind of overall big second phase of this?

MCCONNELL: At the risk of frustrating you, let me say again, that the trigger issue has been the one that has locked us in the extensive discussions. I thought we were very close to an agreement a week ago today, and then went off to our separate corners and in my view kind of wasted a week firing volleys back and forth across the Capitol, but now I think we are back in the right place and the trigger issue is one that we'll let you know we've agreed to when we agree to it.

BORGER: What's something you want, though?

MCCONNELL: We will let you know what we've done on the trigger issue when we make the announcement.

BORGER: OK. So clearly, this is the sticking point, because the Democrats -- I mean, can you say the triggers are the sticking points?

MCCONNELL: Well, that has been an item of outstanding discussion for over a week.

BORGER: And let me go to something you mentioned earlier, which has also been a point of some contention, and that is the question of the balanced budget amendment. The people in the House and the speaker's plan wanted a guarantee of passage of the balanced budget amendment. Would that be in any deal or would there just be a guarantee of a vote?

MCCONNELL: Well, we intend to be voting on the balanced budget amendment in the Senate, and we will let you know when that is scheduled.

BORGER: As part of this plan?

MCCONNELL: We are going to be voting on the balanced budget amendment in the Senate. I hope it will pass, because that's a good, important...

BORGER: But you're not talking about a guarantee of passage.

MCCONNELL: That's an important restraint long-term on the government of the United States which has certainly demonstrated in the decade that it can't get its financial house in order unassisted.

BORGER: Well, let's say you have this deal and you get through the whole trigger question, how much of his caucus does John Boehner have to deliver?

MCCONNELL: You have to ask him that question.

BORGER: Would you expect that he would need to deliver half, though? I mean, looking at the politics of the way this is?

MCCONNELL: Look, I serve in the Senate. The best I can tell you is, I am hoping very soon to have an agreement that I can recommend to my members and we're hoping that we will have a significant percentage of them support it.

BORGER: Why would conservatives who want a guarantee of the passage of the balanced budget amendment, not just a vote as you're talking about, but passage, and deeper cuts, why would they sign on to this kind of deal?

MCCONNELL: Well, I think what conservatives want to do is cut spending, and at the risk of repeated what I said earlier, back in April the administration was asking us to raise the debt ceiling cleanly, with nothing attached to it at all. We have come along way.

I think this agreement is likely to encompass up to $3 trillion in spending reductions, no tax increases that we know will kill jobs, the president made that argument last December when he passed a bill to extend the current tax rates for two more years. He understands that tax increases are a job killer, particularly when you have over 9 percent unemployment, that certainly is not going to be part of this.

BORGER: So can you guarantee to conservatives that no tax increases will be a part of this deal?

MCCONNELL: We're not going to raise taxes in this deal. I just said that, and I will say it again, there are no tax increases in this bill.

BORGER: So even if there is tax reform and closing loopholes, do you consider loopholes...

MCCONNELL: There will be no tax increases in this proposal. Look, we've got...

BORGER: Why would Democrats sign on to this, then?

MCCONNELL: Look, we have got over 9 percent unemployment, Gloria, over 9 percent unemployment. A vast majority of the Democrats back last December voted to extent the current tax rates, not to raise taxes on anybody.

So they understood then, the president understood then, it was a job-killer to do that. We don't intend to start doing that. That is not what this is about. The government spends too much, it does not tax too little.

BORGER: Let me ask you, why would the Democrats sign on to a compromise that included potential entitlement cuts but no tax increases?

MCCONNELL: Well, you will have to ask them. If we get an agreement, the president will be supporting it and he will be making the arguments in favor of it, and you will have to ask the Democrats about what their motivation might be.

BORGER: And we are going to ask that in a moment to Senator Chuck Schumer. One last question, what has it been like to deal with the president and the vice president on this level?

MCCONNELL: I like them both. I mean, I have had a lot of dealings with them over the last couple years. And I am particularly appreciative that we're now back talking to the only person in America who can sign something into law, and that's the president of the United States.

BORGER: Well, thank you so much, Senator Mitch McConnell. Thank you for being with us.

MCCONNELL: Glad to be here.

BORGER: And maybe next time you will be able to tell us exactly what the deal is. Thank you very much. And up next, as we were just talking, are Democrats going to be onboard with this possible deal? We are going to talk to a member of the Senate Democratic leadership, that's New York Senator Chuck Schumer, up next. Stay with us.

(COMMERCIAL BREAK)

BORGER: And joining me now, the third-ranking Democrat in the Senate, Senator Chuck Schumer of New York.

Thanks so much for being with us.

SCHUMER: Good morning.

BORGER: Well, you just heard Senator McConnell, he said a $3 trillion deal, and absolutely no taxes. Is that something you can live with?

SCHUMER: Well, let me say first of all, this -- there is no final agreement. Nobody has signed off on a final agreement. So it's premature to talk about any specifics. The most important thing this morning is if there's a word right here that would sum up the mood, it would be relief, relief that we won't default.

That's not a certainty, but default is far less of a possibility now than it was even a day ago, because the leaders are talking and talking in a constructive way to come up with a solution that would avoid default.

But there are lots of things that are not filled in and many more discussions to go. So it's hard to say anything specifically about this, that, or the other thing.

BORGER: Well, it sounds like they've moved past the question of whether you can get another increase in the debt ceiling six months down the line, making it virtually automatic, essentially.

SCHUMER: Yes, this is very important to President Obama and to us, not so much for the reasons Senator McConnell mentioned, but because we would risk default if we just kicked the can down the road for a few months, did this again, risked the same gridlock, down to the wire, and then a few months later.

It's really vital for the credit markets to have as long a term approach as possible, and it seems quite clear that there will be -- the debt ceiling will be raised enough so that we won't have to come back to this until 2013.

And that's important for another reason as well, not only the credit markets, but we have to focus on the jobs, we have to focus on the economy and getting the economy growing, and if we are just consumed with this debt ceiling for the next year-and-a-half, it would be a dereliction of duty to our constituents.

BORGER: But it's the second part of the deal, I think, that could give Democrats some heartburn here. And that is the question of this enforcement mechanism for cuts in the second part of this, and Senator McConnell was essentially saying that this could affect across-the-board cuts in things like entitlement programs and no revenue.

So how do you negotiate that?

SCHUMER: Well, certainly the enforcement mechanism is one of the key issues that is still being debated, and it's one of the issues that has made this process go on for so long.

And here is what you had to say about it. An enforcement mechanism gets -- doesn't require, but importunes, makes it very likely that the people in this bipartisan, bicameral committee come to an agreement, because if they don't, the pain inflicted is so great that they have an incentive to come to an agreement. Now that means there should be a sword of equal sharpness and strength hanging over each party's head, obviously the sword over the head of Democrats are the cuts. We don't like them. We want to help middle class people pay for their kids to get to college help with prescription drugs, things like that.

What is the sword over the Republican? Well, it has to be equal -- the one thing we are certain of, it has to be of equal sharpness and strength. The preference would be some kind of revenues on wealthy people, on tax loopholes that would be in that.

But another alternative possible, being discussed, no agreements have been reached, would defense cuts of equal sharpness and magnitude to domestic cuts. And in the past, when the trigger has had significant defense cuts, it has brought the parties to the table, and they've come up with a balanced agreement that had both revenues and cuts.

BORGER: So, what you would like, essentially, is if this committee gets deadlocked, which is a possibility to say, here are all the things everyone hates sitting out there, and they will all be triggered and they will occur?

SCHUMER: Yes. That's right. And that, hopefully, brings the parties to an agreement that each side...

BORGER: What if it doesn't?

SCHUMER: Well, if it doesn't the -- we hope it does, because if the sword is tough enough and sharp enough the likelihood of agreement increases. And in the past that has worked.

BORGER: And that would make it more likely, then, that congress would approve this...

SCHUMER: That this joint committee, that this joint committee, and Senator McConnell, I was very glad to say that he thinks a result will come out of the joint committee, so do we. And we're going to fight very hard that it be balanced, that it have both on that joint committee, that it have both revenues and spending cuts, because otherwise it's not fair. You know, middle class people... BORGER: How are you guarantee that?

SCHUMER: Well, there's no guarantee, but what makes it a likely possibility, as I said as the strength and sharpness and equality of the two swords, we cannot go for a sword that is tough on Democrats, but not tough on Republicans.

BORGER: So how do you have these swords out there? You say one, two, three they're all at the same time? SCHUMER: No, what happens is if the bipartisan committee cannot come to an agreement, then these things take affect and Democrats go ouch. And Republicans go ouch, we better avoid it. BORGER: So you are essentially saying you have to have some system that shocks you into doing your job because you might not...

SCHUMER: Well, you know because there is a difference, we have a divided House and Senate, divided government, every side has to compromise. If one party controlled all three, this wouldn't be that hard. Our preference to have a balanced approach, to make sure that tax loopholes for oil companies, for corporate jets, for yachts, for the wealthiest among us who have done the best be part of it.

Their view is that shouldn't be the one to take all the cuts. We, for instance, don't believe that benefits should be cut for Medicare and Medicaid and Social Security, so these are very real differences that have to be bridged and the only way to bridge them is with an enforcement mechanism that is tough and equal.

BORGER: OK. Well, are Democrats ready -- if this were the case, are Democrats ready to provide the bulk of the votes to get this through the congress?

SCHUMER: Well, it's much too early to tell. Leader Reid is being consulted on an hourly basis by the administration. He's made clear what the preferences of our caucus are. And it's too early to tell.

But make no mistake about it, obviously they can't pass this without Democratic votes in the Senate, and so we have real input.

BORGER: Would -- in hearing you say that revenues have to be part of it and then hearing Mitch McConnell says the revenues can't be part of it, is the answer tax reform and loophole closing?

SCHUMER: Well, tax reform is one way to do it. And, you know, it's our believe that revenues should be part. It's their belief that revenues shouldn't. But this committee if again has a good enforcement mechanism, we believe past history shows we will be able to get revenues as part of the committee agreement.

BORGER: So you have a committee and you're going to force it to work. And if it doesn't work, then you're going to have something out there that will force you to get those cuts.

SCHUMER: Both sides. Both sides equally. It shouldn't favor one side or the other. BORGER: And let me ask you, as a leader of the Democratic Party how do you convince the base of your party who really doesn't want any potential cuts of entitlement to go along with this kind of a deal?

SCHUMER: Well, again, you know, the Ryan budget proposed a decimation of Medicare and Medicaid, and we successfully fought that back. And we are going to continue our fight, and I think the base of our party knows this, that there should be no benefit cuts in Medicare, Medicaid, these are programs -- certainly there can be savings brought from Medicare and Medicaid, because there's waste and duplication and inefficiency and all of that, but the benefits to people who really need it should not be cut. And that's been a fight we have been making quite successfully over the last mile, and we are going to continue to make it in these negotiations and further forward.

BORGER: All right. Senator Chuck Schumer, thanks you so much for being with us.

And up next, I'm going to ask one of the president's economic advisers about where the president himself stands on the on going debt ceiling negotiations. Stay with us.

(COMMERCIAL BREAK)

BORGER: And joining me now, Gene Sperling, director of the White House National Economic Council. Thanks for being with us this morning. I know you've been working around the clock here.

SPERLING: Thanks for having me.

BORGER: I know you have been working around the clock here.

Well, you just heard Senator Mitch McConnell who was talking about a $3 trillion deal, and absolutely no revenues as part of it. Is that the deal you're working on?

SPERLING: Well, it's not going to surprise you that I am not going to negotiate here as much as I would like to...

BORGER: That's too bad.

SPERLING: ...or give the exact details.

But let me tell you what the president believes are the three principles for a compromise. One, that we have a significant down payment on deficit reduction, and as part of his willingness to compromise he is fine with that being just spending cuts that are mutually acceptable. That second we come back for a more significant effort at deficit reduction that would include entitlement reform and tax reform that raises revenues. And three, that what ever agreement we have it has to lift the cloud of uncertainty off our economy, off our job creators that has been created, not just by the threat of default now, but the idea that we would just kick that threat down the road and go through this whole mess again around the holidays. BORGER: Well, you know, it seems to me from talking to both of these senators that there seems to be a deal that has been reached to essentially allow an automatic approval of the next installment on the debt ceiling with a vote of disapproval say coming from the congress necessary, a super majority. So if that's the case, then you get to the second phase of this.

BORGER: And the second phase of this is the question we've been talking about all morning, which is how do you guarantee that this commission and that Congress actually does the job it's supposed to be doing on -- on cutting the deficit.

So how do you guarantee that there is a balance, which I presume the president's been talking about it and I presume he wants it, between revenues and spending cuts?

SPERLING: Well, you know, I think Senator Schumer said it very well. You want to have an enforcement mechanism. And what that means, simply, is that, when you get a bipartisan group together to aim for deficit reduction, you want to make it hard for them just to walk away and wash their hands. You want them to say, if nothing happens, there will be a very tough degree of -- of pain that will take place...

(LAUGHTER)

BORGER: It sounds like you're talking to your children, I might add, but never mind.

(LAUGHTER)

SPERLING: Well -- well, but the important thing that Senator Schumer said, which is correct, is that what matters is that that enforcement mechanism be an incentive on both sides to compromise. So both sides have to essentially fear that enforcement mechanism enough that they're willing to come to the table and compromise on an agreement.

That happened in 1990, with President Bush, to avoid an enforcement mechanism. They came together. They had a balanced approach. And there's no question -- this president has been very firm on this -- that he's not going to not ask, in a big deal, for all of the burden to go on seniors, on children, on students, on the middle-class families, and then ask nothing of those who are most fortunate in our society.

And to be -- and let's be clear. That's what most of the public supports. And let's also be clear that, for those familiar with the gang of six proposal, the bipartisan deal in the Senate, we saw 15, 16 Republican senators who, as part of tax reform, were willing to go even further than this present...

(CROSSTALK) BORGER: Right, but they didn't on the deficit commission. You know, you had some Republicans on the deficit commission who voted against it because it had the possibility of tax increases. So let's say you have this commission, and the Republicans appoint a bunch of people on it who are no-taxers, and they don't want to raise revenues, and you start out at that point and you appoint a bunch of people, or Harry Reid appoints a bunch of people who do want revenues?

SPERLING: That's not what this president wants. As you know, this president has been pushing both sides to compromise. He's been pushing both sides to make clear to the public, to markets that divided government doesn't have to be dysfunctional government.

And so you want people who will want to be part of the coalition of getting something done.

BORGER: Right, but -- I'm sorry -- I'm sorry. What I meant was the president's people would want to raise revenues and the Republicans would not want to raise revenues. So why wouldn't their be a stalemate?

SPERLING: Well, let's note a couple of things. First of all, nobody is talking about raising any revenues over the next year and a half. In fact, the president, as you know, has been pushing very hard to cut taxes with the payroll tax cut extension for next year, because we want to make sure we're giving this economy as much momentum as possible.

But you've also seen a lot of bipartisan consensus, more than is often reported, that can you do a form of tax reform that lowers rates and still raises revenue, contributes to the debt reduction, and this president believes can be done in a way that asks those who are most fortunate to contribute, not because you're trying to do class warfare but because you want shared sacrifice.

And you just simply cannot ask sacrifice from seniors, from middle-class families, and not ask the most well-off Americans to be part of that. In fact, if you don't, then the sacrifice on everyone else becomes deeper.

That's the message the president will take to the American people in the coming months...

BORGER: But what I just heard you say is no revenues for the next year and a half?

SPERLING: That has always been the president's position. The president -- you know, remember, everything we do, Gloria, is about trying to strengthen this recovery, this economy, getting jobs going. Removing the uncertainty of default from our economy will be a significant help.

Giving greater confidence that there will be long-term deficit reduction will give people who are doing long-term investments in our country more confidence to go forward. But in the short term, we have to make sure we're giving this recovery momentum.

That's why the president supports a payroll tax cut. That's why he supports an infrastructure bank proposal that can put construction workers back to jobs -- back to work creating jobs. And we're hoping that we will find bipartisan support for those type of job-creating efforts in the short term as well.

BORGER: Gene Sperling, thanks so much for being with us this morning.

SPERLING: Thank you.

BORGER: Hope you get a deal.

Things look promising now, but what can we expect if a deal on the debt isn't reached by Tuesday? Mark Zandi will break down how it could impact your financial security.

(COMMERCIAL BREAK)

BORGER: And welcome back to "State of the Union." I'm Gloria Borger. Candy Crowley is off today. And joining me now from San Francisco, Mark Zandi, chief economist for Moody's Analytics.

And, Mr. Zandi, I have to ask you right off the bat. You've been listening out there this morning. What's your reaction to what you're hearing from Mitch McConnell and Senator Schumer?

ZANDI: Yeah, great news. I mean, this sounds like we're going to avoid a crisis. Three trillion dollars in deficit reduction over the next 10 years is more than what I would have expected. So if they actually follow through on that, I think that's great news.

And that gets us pretty close to what you might call fiscal sustainability. That's our bogey. That's what we need to get to, to restore sustainability in our fiscal situation.

So I'm quite excited. If they can pull this off, I think we're going to be in good shape.

BORGER: How do you think the markets are going to react?

ZANDI: Very positively. You know, I fully -- I think the markets fully expect that they'd get some kind of deal, that they'd push the debt ceiling to the other side of the election. I think that was the minimum the markets expected.

ZANDI: But this sounds like it is going to go beyond that. And I think this idea of a congressional committee with some teeth and some real pressure to come to an agreement is a very positive step. So I think the markets will react very positively.

BORGER: Does this pressure, these enforcement mechanisms, triggers as they are called in Washington-speak, would that give business, markets some sense of certainty that we were going to head on a downward trajectory with a deficit, and is that enough for them to feel certain about their business in the future and how they can operate? ZANDI: Yes, I think so. Obviously it depends on the details and how they are going to structure this and, you know, whether it actually does have teeth and merit. But just listening to the senators, it sounds like they are working to something that is going to be substantive, and I think that will provide enough certainty to businesses.

And, by the way, that's very important. In my mind, a key reason why this economy really has not gotten going and why businesses aren't hiring is because they can't construct a narrative in their mind with respect to how policy-makers are going to do this.

And I think if they get this narrative, this should be very helpful. So, yes, I think it could be very positive.

BORGER: And do you think -- I know you are not a credit rating guru, but do you think this is also enough to kind of avert a downgrade from our AAA status right now?

ZANDI: Well, yes, of course, you know, I am not in the rating agency, I can't speak for them. But listening to what they have to say, I think this would be sufficient, yes.

You know, now, all of the rating agencies have different opinions, some may go down a different path, but I think, broadly speaking, this is substantive -- if it comes to what they are talking about now, this is substantive and I think it should avoid a downgrade.

BORGER: And has all of this spectacle and endless squabbling already hurt the economy to a certain degree? I mean, has it set us back?

ZANDI: Yes, I think it has. I think one of the reasons why we're not getting the kind of job growth that we need is, you know, businesses are just shell-shocked. You know, I talked to a lot of business people in lots of different industries all over the country, and to the person they are extraordinarily nervous about this.

And I think it has -- you know, they don't lay off workers because of this, but they certainly don't hire workers, and that's what we need. And so if they get any kind of clarity on this issue, I think given their profits, given their strong balance sheets, we are going to see them start to step up, we're going to see more job growth and this economy is going to start to kick in. So it's going to be very positive.

BORGER: So you think as a result of this deal, if a deal is indeed reached in the near future, that it will have the effect of creating jobs?

ZANDI: Absolutely. You know, I think the uncertainty of this has been a pall over the entire economy, and that if we lift it, it will make a big difference, and a few months down the road we are going to see a much better economy. BORGER: Well, we had an anemic growth in the second quarter, as you well know, of 1.3 percent, so would this give you any indication if there is a deal, again, that we could start heading in the right direction or not?

ZANDI: Yes, and this highlights, that data you just referred to, the fact that the economy is basically stalled out. It signals how important this deal is. If there is any misstep here, I think it will completely undermine confidence, and it's very likely we will step back into recession. If we get the kind of deal that policy-makers are talking about this morning, I think that will be enough to jump- start things.

This is a very -- the economy, literally, in my mind, hangs in the balance, and policy-makers are the key here, if they do the right thing, then we are going to be OK, if they do the wrong thing, we are going to be in a heap of trouble.

BORGER: Well, Mark Zandi, thank you very much. It's very clear we are kind of standing on the precipice of something, but we have to wait and see in which direction we are headed. Thanks so much for being with us this morning, from San Francisco.

ZANDI: Thank you.

BORGER: And up next, we turn to 2012 politics, and the campaign of Tim Pawlenty. He is a presidential candidate who really likes the word "underdog."

(COMMERCIAL BREAK)

BORGER: In two weeks, Republican presidential candidates will face a critical test, the Ames, Iowa, Straw Poll will reveal which candidate should be viewed as the favorites going into next year's Caucuses, and Ames is going to be a big turning point, for better or worse, for the candidacy of Tim Pawlenty.

Last week Candy sat down with the former Minnesota governor in Des Moines.

(BEGIN VIDEOTAPE)

CANDY CROWLEY, HOST: Governor, thank you for joining us. I want to talk about your new ad that you have out there, using the "do you believe in miracles" from the famous American hockey team that won.

(BEGIN VIDEO CLIP)

TIM PAWLENTY (R), PRESIDENTIAL CANDIDATE: Prove the experts wrong. I am Tim Pawlenty.

(END VIDEO CLIP)

CROWLEY: A concession, I think, from you, that you are running an underdog race, and the question is why? PAWLENTY: Well, for starters, I am not as well-known as somebody who ran last time or has celebrity from other reasons. So we have to do this the old-fashioned way, retail in early states like Iowa, hard work, 700 miles in an RV dubbed "The Road to Results Tour" highlighting my record, not of just giving speeches or talking.

We had enough of that with President Obama, but getting things done in Minnesota in areas like spending and taxes and conservative court appointments. I think when people in Iowa and across the country see what I did as a leader, our numbers are going to move to the positive. And they already are in Iowa.

CROWLEY: And we have a poll out recently that still shows you 2, 3, 4 percent, around in there. And I grant you that you are not a household name in Iowa or in New Hampshire or in the early states, but neither is Herman Cain, neither is Michele Bachmann, both of whom have caught fire.

This must be frustrating to you at some level?

PAWLENTY: Not so much, because I am a student, like you are, these campaigns and history, Candy, people who are doing well in early polls almost never become the nominees. If they did, Rudy Giuliani last time was ahead 10 or 20 points, he would be president today.

CROWLEY: Not in Iowa though.

PAWLENTY: Hillary Clinton was way ahead in Iowa. So these things are not good predictors. And of course, people get attention based on other factors, but over the long haul when you look at record of results, leadership, executive experience and getting things done and not just talking about it. When the people of Iowa zoom in on that, as they will, we're going to do well starting with the Ames straw poll coming up.

CROWLEY: And resume for resume you have started out as a campaign driver which I hadn't realized until I read some of the research, but you've been in the state legislature, you've been a governor. You have a very lengthy resume.

And I just wonder if sometimes when you look at the way the race has gone so far, if you think what is it -- is there an X factor here that I'm missing?

PAWLENTY: Well, I think the X factor of course is people initially get buzz or impact around the media impression. But over the long haul, people look for that impression to be not just somebody who is loud, not just somebody who is entertaining, but can they really be president of the United States?

And look, I think people want somebody in the Oval Office who has an experienced, seasoned record of results. That's what i bring to it. And I think people in Iowa are figuring that out and you're starting to see our numbers move to the positive.

But the point is, we live in very serious and challenging times. And look if somebody wants the entertainer in chief, or the comedian in chief or the loudest person in the room who just has great speeches, that's not me. You've got to be authentic. If you look for what has this person done in terms of results on spending, on taxes, doing health care reform the right way, conservative appointments, all the Republican candidates are going to say they did it, or could do it. I've actually done it.

And I think voters will figure that out. They're wise and discerning people. And the flavor of the month comes and goes, but if you look at these races over the long haul, that's going to be a very important criteria.

CROWLEY: Flavor of the month, needs to have executive experience. These are all code works for Michele Bachmann.

PAWLENTY: Well, look, I know Congresswoman Bachmann, I like her, I've campaigned for her. I respect her. We share many or most conservative values. But the fact of the matter is, as I've said before, her record in congress in terms of results is nonexistent.

And she hasn't -- and doesn't have the executive experience of running a large enterprise with a public component and driving it to good results. I have.

CROWLEY: What about passion? I wonder sometimes people say, oh, he's so nice. Is he too nice? Do you have the fire in the belly?

PAWLENTY: Of course. And look everybody has different styles. And leadership styles can vary. I've got more than one gear. And you look at what I did in Minnesota, one of the most difficult political environments in the country for a Republican, first government shutdown in 150 years, set a record for vetoes, used executive authority to cut more money out of the budget in my eight years as governor than all the 142 years of governors combined. So this idea that you know I haven't fought -- look, you've been in bars, the person who shoots their mouth off, the loudest person usually isn't the toughest.

Don't confuse being positive, or optimistic with being weak. You can be both strong and pleasant and nice. Those aren't contradictory things.

And Ronald Reagan is a great example of that.

CROWLEY: Let me ask you about the Ames straw poll. You've got a couple weeks until the Ames straw poll. You have said we need to show movement, trajectory. Your aides have said that. Does the Ames straw poll matter to you in terms of whether -- of your intent to stay in through the caucuses and beyond?

PAWLENTY: Well, we're in this race to win. We're going to win the Iowa caucuses. I suppose if we came in dead last or something in the straw poll, that may have a bearing. But we're not going to do that. We're already showing good progress. And our goal is to move, as I said earlier, from towards the pack of the back to the front of the pack. I'm absolutely confident that will happen. This idea that we're going to drop out after the Ames straw poll is preposterous.

CROWLEY: And also difficult to fight politically. I mean, if you're raising money it's hard when people are going, oh well, if he doesn't do well in the Ames straw poll...

PAWLENTY: Well, have you seen those stories about Rick Santorum, or Newt Gingrich or Herman Cain, or the others. So obviously Mitt Romney has been the frontrunner, is the established frontrunner. We acknowledge that. But he was the frontrunner last time. And there's plenty of time and plenty of room for others to catch him, and we will.

CROWLEY: Governor Pawlenty, I want to thank you so much for joining us here today. We appreciate your time.

PAWLENTY: You're welcome. Thanks for having me.

(END VIDEOTAPE) BORGER: And up next, the latest on the debt negotiations and other headlines. Then Fareed Zakaria GPS at the top of the hour.

(COMMERCIAL BREAK)

BORGER: And now a time for a check of today's top stories. Earlier this hour, Senate Republican leader Mitch McConnell told us negotiators are, quote, very close to a deal to raise the debt limit and avoid default. McConnell said the deal would call for $3 trillion in spending cuts over the long term. He said the debt limit would be raised in two stages with some sort of mechanism to increase the ceiling again next year.

And Senator Chuck Schumer grants that they're making progress, but says there's no deal until everything is agreed on. And the president's chief economist says the White House does not expect additional revenues in the next year and a half.

And the attorney for the two American hikers detained in Iran says the verdict should be issued within a week. Josh Fattal and Shane Bauer were arrested two years ago while hiking in Iraq, accused of entering the country illegally and spying.

A suicide bomber's car exploded in southern Afghanistan killing 12 officers and injuring 14. Meanwhile a top Afghan defense ministry official who allegedly leaked information to insurgents has been arrested in Kabul.

Those are today's top stories. Thanks for watching State of the Union. I'm Gloria Borger in Washington.

And for the latest on the debt ceiling talks, tune in to CNN tonight at 9:00 eastern for a special report Countdown to Debt Crisis. Wolf Blitzer, Don Lemon and I will be breaking down the latest in the negotiations and what impact they will have on you. That's tonight at 9:00 eastern only on CNN. And up next for viewers here in the United States Fareed Zakaria GPS.