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State of the Union

Interview with David Axelrod; Interview With Governors O'Malley, McDonnell; Interview With Elijah Cummings

Aired August 21, 2011 - 09:00   ET


CANDY CROWLEY, HOST: An August of angst as a fragile economy and the battle for 2012 erode the president's support.

Today, the summer slump with Obama senior campaign strategist, David Axelrod. Then job creation in uncertain times with Governors O'Malley of Maryland and Bob McDonnell of Virginia, and Congressman Elijah Cummings, the former chair of the black caucus and analysis from Greg Ip of the Economist and Chrystia Freeland of Thompson Reuters digital.

I am Candy Crowley, and this is State of the Union.

What a difference a year makes, or not so much. Last year at this time, President Obama was vacationing on Martha's Vineyard, that's where he is today. Last year he said...


PRESIDENT BARACK OBAMA: A year and a half ago the economy was shrinking rapidly. The economy is now growing.


CROWLEY: This year he is saying...

(BEGIN VIDEO CLIP) OBAMA: America is going to come back from this recession stronger than before, that I am convinced of.


CROWLEY: Unemployment was above 9 percent in August of 2010, one year later it still is. Compared to last summer, even fewer Americans approve of the president's handling of the economy. And more say the economy is getting worse.

Joining me now from Michigan, Senior Obama campaign strategist David Axelrod.

David, thanks for being here. I want to ask you first, the president...


CROWLEY: The president is going to have this new jobs plan and a stimulus that is coming up in September, he's going to announce it. Tell us what you know about that, and in particular when we talk about modest adjustments to entitlements, what is that?

AXELROD: Well, first of all, let me say, these are not all new ideas. Some will be new, some we already talked about. There are things he has been asking congress to do for some time, and some of them -- for example, extending the unemployment -- the payroll tax cut that was passed in January for another year. That's something that is absolutely critical to do.

There are basic things we need to do relative to infrastructure, rebuilding our roads and bridges, that needs to get done.

So some of the things will be familiar because he has been talking about them.

One of the things that was disturbing to me, Candy, was in the last week I saw a spokesman for Speaker Boehner say well, we're only going to pass the new trade treaties and patent reform that the president has asked for, and we are not going to deal with anything else.

How do you let 150 million people -- working people in America get $1,000 tax increase on the payroll tax in the middle of these economic challenges we have but you won't touch a penny of corporate tax loopholes, you won't touch tax cuts for the wealthy? It doesn't make sense.

So I hope that over this break they've heard from their constituents, they are ready to rethink this.

CROWLEY: Well, it seems to me in a sense, what we are hearing from economists and a little bit from we're hearing from the White House that in the short term to spark the economy we need more stimulus, including unemployment benefits, but you are talking about the roads projects and other things that the economy may need to kind of jump-start itself and maybe start to cut into the jobless rate.

And at the same time we need long-term deficit cutting. So you are trying to do deficit reduction and stimulus at the same time. Is that a hard sell?

AXELROD: Well, you put it exactly right. In the short term we need to do things to accelerate -- to accelerate the economy. We have taken big hits in the last six months that nobody could have anticipated, the Arab Spring and its impact on oil prices, the Japanese earthquake and the problems that Europe is experiencing now have all impacted on our economy and we need to take some additional steps to accelerate the economy in the short run. And everybody should be able to agree on that.

In the long run we also ought to agree that we need deal with our debt issue. We have obviously had a long discussion about it. But we have to deal with it in a way that is smart, that's balanced, that's fair, where everybody is in, and where we're protecting those things that we know are important for growing the economy and creating good middle class jobs in the future -- education, research and development, yes, rebuilding our basic roads, bridges, railways, waterways, the things we need to move our goods across this country. Those ought to be protected. And so we ought to have a discussion on both these issues and we ought to act. I think people are tired of the games in Washington. The only thing that keeps us from acting on many of these things is pure politics. The fact that we can't agree to extend a payroll tax cut for working Americans is bewildering to me. And the only explanation is politics

CROWLEY: Well, and -- but one could -- a cynic might also suggest, and let me suggest it here, that you are all are putting things out there that you know, particularly the House Republicans will not go for so that you can then have that to run on.

So you know, there's politics kind of at both ends of this spectrum, is there not?

AXELROD: Candy, I think what you will find when the president unveils the entire program is that there is nothing in there that reasonable people shouldn't be able to agree on. And if we make the House Republicans, and particularly that Tea Party faction, if we make them the standard, we're in deep trouble. This is the group that almost brought us to the brink of default.

And one of the problems that I have right now is too few Republicans are willing to stand up and say to that group back off, let's do what is good for the country, let's not be so partisan, so ideology that we can't come together and solve our problems.

CROWLEY: What is meant by modest adjustments to entitlements which we're also told will be included in this package from the president, what does that mean? Cuts in Medicare?

AXELROD: Well, again, I am not going to get out in front of the president on this. But he has been very clear and he's been clear for months on the issue of Medicare. Medicare has financial problems and everybody knows it. We extended the life of Medicare through the Affordable Care Act by eight years. But fast upon us is going to come the time when Medicare is insolvent. And in order to keep our commitment to today's beneficiaries and to make sure that Medicare is there for American workers in the future when they reach their retirement, we're going to have to make some, as the president said, modest adjustments. And he will address that.

CROWLEY: Let's go through some demographics here for you as you -- I know you know them better than anybody else. And I want to start with something that Maxine Waters had to say recently about the president. As you know the CBC and other African-American lawmakers have complained for some time that the president has not done something specifically to address horrific unemployment rates in the black community.

Here is what she had to say.

(BEGIN VIDEO CLIP) REP. MAXINE WATERS, (D) CALIFORNIA: We're supportive of the president, but we are getting tired y'all. We're getting tired. The unemployment is unconscionable. We don't know what the strategy is. We don't know why on this trip that he is in the United States now he is not in any black communities. We don't know that.


CROWLEY: So you are taking some heat from African-Americans, and some of the most loyal supporters you have got saying look the president goes on the jobs trip and doesn't go to the minority community where the jobless rate is the worst. Are you taking this constituency for granted? Because that's what it looks like to them.

AXELROD: Absolutely not. And just because on one trip the president doesn't stop in every community doesn't reflect a policy judgment or a commitment judgment on his part. One of the major negotiations in this last debt discussion was how do we prevent those who are poor from being unfairly and unduly burdened by the cuts we have to make, and that's why Medicaid, why Pell grants for needy students who want to go to college and several other things, and they were cordoned off.

Well, those programs are going to disproportionately help poor Americans whether they are black, white, Hispanic, so they are all geared toward helping people who are in the most vulnerable positions.

But obviously the whole array of things, when we have a surface transportation program, which is now stalled by politics in the House of Representatives, roads and bridges, people are put to work and those jobs are going to be felt in the African-American community as well as other communities.

We are fighting for things that will put people back to work. And the community, the African-American community will certainly feel the affect of those if and when we succeed. And this is a battle that we have to win not just for that community, but for every community. There are things we can do to get people back to work.

But the other point, Candy, as we also have to do things to prepare our kids so they are not mired in a cycle of poverty, and that has to do with education improving standards in our schools, making higher education more accessible, improving our community colleges and making them a training place for jobs and not just a next stop in a failed education pattern. Those are the things we're working on as well. And they go to the heart of the problem.

CROWLEY: David Axelrod, it's always too short of a time for you, but we really appreciate what time we could have this morning.

AXELROD: Thanks, Candy. Good to be with you.

CROWLEY: When we come back, two leading governors give some advice to President Obama on how to get the economy going.

(COMMERCIAL BREAK) CROWLEY: Joining me now to give their view of the economy, Republican Virginia Governor Bob McDonnell in the state capital of Richmond, and here in Washington, Democratic Maryland Governor Martin O'Malley. Both men are chair of their party's governors association.

So welcome to you both.



CROWLEY: Let me start with you, Governor McDonnell, and ask you what you most need Washington to do or not do in this upcoming battle over a jobs package and a deficit-cutting package?

MCDONNELL: I think it's crystal clear to every American, frankly, that they have got to have a course of sustainable spending cuts. We're in debt $14 trillion and heading towards 20-plus, largest deficit in American history, $1.65 trillion.

And part of that is these crushing mandates on the states, whether it's in environmental areas, the federal health care reform, mental health. We have got $10 billion to $12 billion of unfunded mandates on Virginia.

So what they need to do is they've got to cut spending and they've got to lessen the unfunded mandates on the states, because we can't afford it.

CROWLEY: Now does that mean, just to follow-up on that, that you would be opposed to, say, an extension of unemployment benefits that go out at the end of the year, an extension payroll tax cuts for employees, perhaps a payroll tax cut for employers, all of those things would cost money, those are not revenue enhancers, those are revenue takers, are you opposed to all three of those things?

MCDONNELL: Well, I think if they are short term things that are done that can really demonstrate that it's going to create jobs and promote economic activity, we ought to consider it. The problem was this...

CROWLEY: Extending unemployment benefits?

MCDONNELL: Well, I don't think that creates jobs. It lessens the pain. Look, there are a lot of people hurting. We're down to a 6 percent unemployment rate in Virginia. But we've got 250,000 people unemployed. That's really painful. So short term assistance is fine.

The problem is we need to have things that create jobs, not just promote benefits for people that are not working. People want work.

CROWLEY: Governor O'Malley, let me ask you the same question. What do you most -- what would most help you in the state for Congress and the president to do or not to?

O'MALLEY: Well, I think the most important truth that we need to recognize as Democrats and Republicans, Candy, is that for a modern economy to create jobs a modern economy requires investments. Being fiscally responsible is important, avoiding default is important.

You know, my colleague, Governor McDonnell, and I both defend triple-A bond ratings, and that debacle of driving our country to the brink of default that all of us witnessed last month is not helpful to consumer confidence or investor confidence.

What I hope the Congress will come back to do is to pass bills that actually make those investments in infrastructure, in research and development, in innovation, and, yes, in the important work of educating the next generation for the jobs that are available.

CROWLEY: But you are talking about spending money at a time when we're cutting the deficit?

O'MALLEY: Well, I think we need to do both. You know, we need to be able to balance...

CROWLEY: What about tax breaks for businesses?

O'MALLEY: ... and pedal forward at the same time. I think it depends on the nature of them. If it's something that actually creates and inspires investment and innovation, I would be for it.

But, look, I think that we have to also recognize that this deficit is driven, fueled, and caused primarily by Bush era tax cuts that benefited the most wealthy among us. That's 55 percent of the projected deficit by 2019. Another 14 percent is these wars.

So we have to be able both to balance our budget, but also make the investments required in a modern economy if we are going to create jobs.

CROWLEY: Governor McDonnell, would you agree to some kind of short-term spending to try and pump up the economy? It seems to me that Governor O'Malley is talking about research and development and some education, you know, to pump up jobs and some education funds and some infrastructure, road projects to put construction people back to work. Any of those unacceptable to you?

MCDONNELL: Well, you know, Candy, we've tried that. And, look, Martin and I get along great working on things around the Washington area...

CROWLEY: But you disagree with all of that.

MCDONNELL: ... on airports, on Metro and other things. And he's a great Irish-American, just like me. No, I disagree with him on that. We've tried that. We've tried stimulus spending. We put very little into infrastructure. We put it into a lot of other spending that didn't create jobs. And now we've gone from 7.8 to 9.1 percent unemployment.

And I absolutely disagree with the governor that he continues to blame Bush. You know, the president has been trying that for three years. He had two years with a Democratic Congress and a Democratic president, did not address the deficit or the debt or a jobs program. Here we are three years in the administration and starting to talk about jobs. Here is what I suggest. We could look at what the states are doing. I had a $4.2 deficit in Virginia, a $2 billion tax cut that Governor Kaine proposed. We killed that. We invested in job- creating activities. We now have a $545 million surplus.

Unemployment is down to 6 percent. We're a "right to work" state. And jobs are coming back to Virginia. I mean, those are the things that will make a difference, not more taxation and regulation and spending. That's not the path to success. And that's what this president continues to try to do.

CROWLEY: Go ahead. I won't even ask the question because I hear you starting a question here, so.

O'MALLEY: No. I just wanted to say, Candy, that, you know, Governor McDonnell is right in one respect. You know, the stimulus did not go far enough. The governor just criticized it for not investing enough in infrastructure. I think in retrospect, that's probably true.

MCDONNELL: No, I said it invested in the wrong things.

O'MALLEY: And Governor McDonnell accepted every single dollar that the president courageously passed through the Recovery and Reinvestment Act. We need to invest in our infrastructure, our roads, our bridges, the things that actually get people back to work.

And we can do that and balance budgets at the same time, as we have on both sides of the Potomac. But we need Virginia and Maryland both to be creating jobs. This last month Maryland had a great year -- had a great month of job creation.

On the year we ranked 20th. Virginia ranks 44th in job creation. We both need to be stronger and we both need to create jobs. All the states need to create jobs to get our country out of this recession.

CROWLEY: I'm going to ask you both to stand by. We will be right back. Up next, we wanted to talk 2012 politics with the governors, so stick with us.


CROWLEY: We are back with governors Bob McDonnell of Virginia, and Martin O'Malley of Maryland.

First, Governor O'Malley to you. Something that -- a graph from a Reuters article that we saw sort of spells out the president's election year challenge. And it says it says the White House's worse case scenario for the economy on election day next year has become Wall Street's baseline scenario. JP Morgan sees gross domestic product growth at just 1.5 percent this year, 1.3 percent next year, with unemployment at 9.5 percent heading into the final days of the election season. How does the -- what is the president's bumper sticker at this point? How does he campaign? Give me more time. It's all the Republicans' fault? I mean, this is a very bad economic scenario.

O'MALLEY: Well, I think what the president has to do is to articulate a concept for making our children winners rather than losers in this economy, and going to congress and fighting for it. There are some things...

CROWLEY: Does he have to be tougher?

O'MALLEY: I think what he has to do is to have that adult conversation with all of us as Americans. We're all smart enough to know that there's a big change happening in our economy. We're smart enough to know that when there are changes there are winners and losers.

And what the president needs to do is to more clearly articulate, as he started to in the State of the Union Address, that in order for our children to have a better shot at succeeding in this changing economy, we need to do what our parents have done in the past and that is to have the courage to invest in our children's education, invest in innovation and rebuild the infrastructure of our country.

I mean, you have heard -- you've been probably to Communist China, they are outperforming us as capitalists. They are investing in their country. They are investing in bridges, high speed rail, the things that create jobs, R&D. And if we are not careful as a nation, if we continue to engage in the sort of dismantling of all of the things that we used to do together as a people, then we're not going to be able to look at our children with pride in the eyes in our golden years.

CROWLEY: Governor McDonnell, I think you probably heard enough of the Democratic response sometimes to the economy. And it seems to me that what the White House is going to do this year is the Tea Party is crazy, they are not going to do any of the things that Governor O'Malley just talked about, they won't invest in education, they're going to put granny on welfare, that kind of thing.

How do you take the harsh edges in perception anyway off of the Republican Party at this point? Because the Democrats are driving hard at Republicans have been co-opted by the way conservative wing.

MCDONNELL: I think that's very unfortunate rhetoric. You know, we need more civility in politics. Martin and I disagree on policy issues, we work well on regional issues. Tea Party says, look, we want same things middle class America wants. We want less spending. We want a balanced budget and want to keep taxes where they are. That's a reasonable message.

But words like dinosaur wing and extremist, it's not helpful to the civility in our country.

If you want to look at what is working, I would say you look at what Republican governors are doing, 9 out of 10 in the Polina (ph) poll this week were Republicans in terms of the best business climate, three states with Republican governors increased their bond rating.

So I think Martin is right to a degree. We need to invest in infrastructure. But you can't do that but just increasing spending overall, that's a recipe for disaster when we're heading towards $20 trillions. You've got to cut entitlements. You've got to cut discretionary spending. That's the honest conversation the president needs to have.

We're broke in Washington. We can't afford this level of spending. Infrastructure, yes, all these entitlements and discretionary spending, can't afford it any more.

CROWLEY: Would you agree with that? Doesn't an honest look in spending in Washington include entitlements?

O'MALLEY: Yes, absolutely. I think we need a balanced approach which is why it's so very disappointing, Candy.

CROWLEY: But that includes cuts in these entitlement programs.

O'MALLEY: Yeah, sure. And I think the president much to ire of some in his own party has shown a willingness to engage in that conversation, but three different times members of the new era Republican Party have walked away because of their worship of tax cuts for millionaires and billionaires.

We need a balanced approach here. And I would disagree somewhat with some of the assertions of Governor McDonnell. If you look at the choices voters made like in places like Florida, Governor Scott, Governor Kasich in Ohio, Governor Christie whose bond rating was just downgraded in New Jersey, these are not successful governors that are inspiring on the Republican side that confidence and the future of job creation in their states.

CROWLEY: Let me just turn you quickly in our final minutes to the subject of illegal immigration. The president has said of the 300,000 or so deportation cases now in front of immigration he wants a case by case look, and anybody that isn't a threat to society and that has not committed a criminal act should stay, they should just take them of the dockets.

Is that amnesty, Governor McDonnell?

MCDONNELL: I correct Martin on one thing. Ohio, Michigan and Florida just had their bond ratings increased because they had the guts to lead and cut spending. So those are the facts on that.

Look, I think -- we are a nation of immigrants. Martin and I share the same heritage. About 100 years ago, I think Irish-American. We need to have more lawful immigration in the country. The problem is, this president -- frankly for decades we have not secured the border. We haven't enforced the laws that we have got in the states. And we haven't come up with a reasonable path to citizenship for people that are here so...

CROWLEY: Is it OK with you that these folks are being taken off -- anybody that is currently being looked at that has not committed a crime be taken off, and then perhaps given a work permit. That's OK with you? I just need a quick answer?

MCDONNELL: Well, as long as we tie lawful immigration to economic activity, and the economic needs of America so we don't compete with Americans who are unemployed, I think we ought to look at pursuing that.

CROWLEY: As quickly as you can.

O'MALLEY: As quickly as I can, I think we do need to create a path for citizenship. I think people do need to pay their taxes and obey the law. Our immigration system is broken. I believe that the president's administration, Secretary Napolitano has done a better job of deporting violent individuals, but we need to create a path to citizenship so that great governors like Andrew Cuomo, and Pete Shumlin in Vermont, and John Hickenlooper in Colorado, can build up their states and create jobs and opportunities for the future.

CROWLEY: And you have great governors as well, let's just put it there and leave it at that. Thank you so much.

MCDONNELL: Thank you.

CROWLEY: Bob McDonnell, thank you so much. Martin O'Malley, thanks for being here. Great to have you both back.

O'MALLEY: Thank you, Candy.

CROWLEY: Up next, signs of tension between the nation's first black president and the lawmakers who represent many African-American communities.


CROWLEY: There is no more loyal group of Democrats than African- American voters, and no racial group has been more devastated by hard economic times, 15.9 percent of blacks are unemployed, double the rate of whites, 26 percent are living below the poverty level compared to 12 percent of whites.

And therein lies the dilemma for the 43-member Congressional Black Caucus, 42 are Democrats, many of them angry with the first African-American president for not doing more to help the black community.

This week while the president was touring the predominantly white Midwest, members of the Congressional Black Caucus held jobs fairs in places like Atlanta and Detroit, cities with overwhelmingly black populations and unemployment rates over 10 percent. Point made.

Up next, the former chair of the CBC, Congressman Elijah Cummings of Maryland.

(COMMERCIAL BREAK) CROWLEY: Joining me here in Washington, Congressman Elijah Cummings, former chair of the Congressional Black Caucus and, of course, currently a member of the Congressional Black Caucus.

Are you pulling -- the impression that we got over the past couple of weeks from things that Maxine Waters has said and John Conyers has said is that black lawmakers are pulling their punches when it comes to President Obama because so much of your community and so many of your constituents are so supportive of him. Is that so?

REP. ELIJAH CUMMINGS (D), MARYLAND: I think there's a lot of truth to that. All the polling data shows that the African-American community is very protective of our president. And they see him as their son, as their brother, and they see us and they are very proud of him.

But there is something else that is happening, Candy. They see -- they believe that he is being beaten up every day by the tea partiers, by just about everybody. And while in spite of all of his efforts -- in spite of their efforts, he is still making tremendous progress.

So they're very protective. So it's a kind of -- you know, it's a two part. On one hand, they are very protective, and they really care. On the other hand, almost every African-American I have talked to said they want him to fight and fight harder.

Because they don't -- they believe that he sees the possibility of some bipartisanship from the Republicans, but they don't see it. And so their attitude is that if the Republicans are not going to work with us, we're just going to have to go it alone and stand up to them, don't back down, period.

They are not going to give you anything anyway.

CROWLEY: Right. So the community in general, your constituents think he just has not been tough enough, but he's -- you know, we love him, he's our president and so we're sticking with him, we just want him to get out there and fight.

CUMMINGS: And fight.

CROWLEY: But what about these tremendously high unemployment rates, which are not new in the African-American community, but nonetheless that's a community that has been hardest hit.

CUMMINGS: No doubt about it.

CROWLEY: And so do you not feel as the representative and leader in your community that you need to be kind of continuing to push him publicly to do something specifically for the community?

CUMMINGS: No doubt about it, we have to do that. And I think in a way it's good for him. The president said -- and by the way, I am a big supporter of our president, but he said during the election process, he said, I will not tell you what you want to hear, I will tell you what you need to hear.

We need to do the same thing with this president. But I think he has done a lot already. But I think it would have been...

CROWLEY: What does he need to hear?

CUMMINGS: He needs to hear that there are a lot of people suffering, and 40 miles from here in Baltimore, we probably have got black males unemployment of 40 percent. He needs to hear that.

He needs to hear that -- he needs to go back to the horse that brought him in. In other words, when he came in he talked about hope, he talked about jobs, he has talked about fairness, he has talked about addressing Wall Street effectively and efficiently, and trying to make a difference. He has got to go back to those basic points. That's what got him in.

The other thing that he needs to do, you know, just like -- you know, I kind of believe that there is a silent minority, Candy, out there -- a silent majority, rather, and a lot of times they are not being heard.

And I think that basically what Maxine Waters said will cause more of those folks to come out and give the president some backing. And, I mean, look at what is happening in some of these Republican districts, where they are going to their town hall meetings.

And now people are beginning to say, wait a minute, hold it, you mean you are going to cut my Medicare, you are going to cut my Social Security, but give the richest of the rich tax cuts?


CROWLEY: Yes, but that's kind of an argument that is being had across all communities here.

CUMMINGS: But what I am saying is that the -- for the African- American community, what we -- I think we need -- we are leading. We will lead that discussion. And I think the more people that look and see what is happening with the African-American community, I think the more impact it will have on those kind of discussions in those Republican districts.

Always remember, it's not just the president, Candy, the buck doesn't stop with the president, it also stops with the Congress. We have got to get a Congress in there that will do the right thing.

CROWLEY: I want to play you a quick -- something that your colleague John Conyers said about lobbying the president.



REP. JOHN CONYERS (D), MICHIGAN: I want him to know from this day forward, starting with the initiative of the Out-of-Poverty Caucus, that we have had it, we want him to come out on our side.

CONYERS: We're suffering.



CROWLEY: So just this sense that he is not on your side -- and by that I mean -- I think he means the African-American community, those in poverty, which includes, obviously, more than African- Americans.

So what does "We've had it" mean to you?

CUMMINGS: I think -- I think -- meaning that we're totally frustrated and that, again, people need to -- the president, they need to know that the president feels their pain and is trying to create jobs. Jobs has got to be the number one...

CROWLEY: But you want something specific for the African- American community, correct?

CUMMINGS: No, no, listen. We want -- you know, in this country, where there is suffering, when we have major problems, that's where we go; we go to rescue people, to help them out.

It just so happens, Candy, that in many of the African-American communities, the suffering is greatest, twice the number of -- percentage of unemployed people.

So it would be -- I mean, we want the president to go to Iowa, but we also want him to come to Detroit; we want him to come to Los Angeles. And we want him to stick with a jobs agenda.

You know, basically, what the Republicans have done, they've argued this thing, tax cuts, tax cuts, (inaudible), but, you know what; there are some tax cuts we simply can't afford.

CROWLEY: Let me -- I just need a quick yes or no answer if I can get it from you.


CROWLEY: Do you think that the president has taken the African- American vote and the African-American community for granted in terms of support?

CUMMINGS: No, I do not.

CROWLEY: OK. Thank you so much for coming, Congressman. We appreciate your time.

CUMMINGS: Thank you.

CROWLEY: When we come back, President Obama says there's no danger of another recession. Our economic panel weighs in, next. (COMMERCIAL BREAK)

CROWLEY: Joining me now to discuss recession worries, Chrystia Freeland, editor for Thomson Reuters Digital, and Greg Ip, U.S. economics editor for The Economist.

Thank you both for being here.



CROWLEY: I hardly know where to start. But let's start with what in the world is -- I hear so many reasons why businesses are not spending. They're worried about regulation. They're worried about, you know, what's going to happen with health care, or they're not selling anything, so they're hoarding their money.

What gets the private sector to step in?

I'll start with you, Greg.

IP: I think the first thing we have to recognize is that the recovery, if you can call it that, that we're going through is somewhat unique in that it comes after a financial crisis. And everything we know about other countries and our own history, from going through an event like this, is recoveries are very difficult and slow because people have a lot of debt left over from the bubble years and they're trying to pay it down. And there's...

CROWLEY: And by people, you don't mean corporations; you mean people?

IP: Mostly households, in our case, yes, people with houses that are no longer worth the mortgages they took out to buy them. And it's very difficult to get sales and consumer spending going in that environment. And so one of the things we have to recognize is it's going to be several years of this very sluggish recovery. And that is not a very cheerful message for business, but it is reality.

FREELAND: Yeah, so I agree with Greg. I mean, business has to make a really, sort of, cold-hearted assessment of the economic prospects. And that assessment tells you right now, if you're doing business in America or in Western Europe, the economic recovery is really, really sluggish. Even if you don't think there's going to be a double-dip recession, economy is growing really, really slowly.

In that kind of environment, it's the wrong decision to invest.

CROWLEY: So -- and we're looking, according to some of the folks, you know, a year out, to a still very slow economic growth and very high unemployment. Would you both agree with that outlook for 12, 18 months from now?

FREELAND: It's hard to disagree with it. IP: Yeah, I think really the question right now that people are wrestling with, is this slow growth or it actually decline back into recession? And the events that we've seen...


IP: ... over the last week or two is that people think the odds of going back into a recession are on the order of 30 percent to 45 percent.

Now, if you look at what's happened in the stock market in the last week, you would say, oh, my goodness, I mean, we clearly are in recession right now.

You need to step back a little bit, and you can see that the hard evidence suggests that the economy actually is still growing. We've had a bit of information for the month of July, retail sales, employment, manufacturing production, all doing a little bit better than expected.

The thing you have to worry about is that the volatility, a lot of which actually isn't even based on events in the United States, but in Europe, is scaring people. And the businesses who are about to invest, families who were about to go out and buy that home, are just going to say, hold it; I'm freezing for now; I'm going to wait this thing out. And that becomes a self-fulfilling prophecy.

FREELAND: Which is, not to be too much of a gloomster, Candy, but the one area where I think people are still really worried and where we've had some data that reinforces those continued worries is housing.

We still -- you know, if you think about the economy as a boa constrictor, that, you know, rabbit of the big housing crisis, it hasn't been digested yet. And that, I think, is really holding down U.S. households in all kinds of ways.

It means that there is less mobility in the labor market. People can't sell their homes so they can't move to a place where they could get a job. It means the construction industry is absolutely dead. And, really, we haven't seen that go away. In a lot of ways, it's getting worse.

CROWLEY: And so this brings me to two questions I wanted to ask. First to you, because you brought up Europe. As long as there are these huge problems in Europe and they haven't figured their way out of the huge debt, can the U.S. economy recover? IP: Yes, it can. In fact, we're, sort of, replaying what happened almost exactly a year ago when the Greek crisis first exploded. It created this, like, volatility in our markets, and people, sort of, stepped back and said, hold on; I'm going to take a break.

And when they realized that it wasn't ricocheting into the United States, things ramped up again.

You know, Candy, I think one of the big problems here is that, notwithstanding that the outlook was going to be sluggish almost no matter what, we have a series of self-inflicted wounds. Policymakers in Europe and here in the United States are perceived not just to be able -- unable to respond, but unwilling to respond. And I think that chips away at confidence as well.

CROWLEY: And to the housing part of the equation, has housing bottomed out or are we in for more bad news in the housing department?

FREELAND: I think we're still in for more bad news. And it's not a question of whether it's bottomed out or not. I think it's a question of whether we have dealt with the fact that a lot of people bought houses that they couldn't afford and a lot of banks lent more money than they should have done. And that...

CROWLEY: So we're still dealing with that?

FREELAND: ... foreclosure problem hasn't been worked through yet. So, yeah, I think that there's still a little bit more bad news there.

And on Europe, I actually think, Greg, again I don't want to be the big doomster here, but I think Greg may be a little too optimistic on Europe.

IP: I get that a lot.

CROWLEY: How sad, Eric.

FREELAND: But I think as long as what we see on Europe is problems which then get fixed, then that isn't a break on a U.S. recovery. But it is possible that there is a real crisis in Europe, you know, and we haven't yet seen from Europe, particularly from Germany, a solution that solves the sovereign debt problems in the weaker European countries, not just like Greece and Portugal, but also now like Spain and Italy.

Until we see that solution, there is a real possibility of a full-blown financial crisis coming out of Europe.

CROWLEY: Let me move to what the president or congress or the Fed might be able to do to at least ease the slowness or speed up -- whatever it is we need them to do. And the fact of the matter is most people look at it and say, they've run out of ammo here. We're now kind of running on fumes in terms of what can be done by any of the policymakers. Is that true?

IP: Well, I think you would say that, yeah, they're out of bullets and bazookas and down to broken pool queues and baseball bats. So, yeah...

CROWLEY: What imagery.

IP: It's not an impressive array of weaponry that they have left.

But there are some things. And the first thing you can do is first do no harm. If you just look at what's baked in the cake, we're going to have a fiscal tightening worth 2 percent of GDP come January just as the temporary measures implemented last December run out. That's why the president has been pushing hard to continue some of those measures like the payroll tax cut.

Politically and realistically it's hard to imagine we'll get a lot more than that. But that would be helpful, because it doesn't in some sense make matters worse than they already are. And they give the economy a little bit of breathing space.

The Fed has done as much as it can do, could probably do a little bit more. But let's face it, now that you have ten-year bond yields at their lowest like I think like 60 years, it's not clear that the Fed doing more is going to accomplish a lot.

The final thing, we've been talking about housing. There's a lot to do to help housing, a lot more to get people's unserviceable debts down, clean out that morass debt weight and debt and perhaps take a little break from all the litigation and regulation which I think is making things worse in terms of the lending community.

CROWLEY: Are we out of ammunition here? And as an adjunct to that question, can you have stimulus spending and deficit reduction in the same policy which is -- it seems to me that's where the president is going here.

FREELAND: Sure. I think that that would be the consensus view of mainstream economists, is that's what you actually need. And it's not as contradictory as it sounds.

CROWLEY: Pour some more money into the economy while cutting government spending.

FREELAND: In the medium term.

I think that if you had economists as dictators of the world -- and that is not necessarily the ideal thing. You know, we have lots of reasons to doubt them, but if you wanted to appoint economists as dictators of the world, what they would advocate right now is more stimulus. And that's impossible only because of American politics, economically it's absolutely feasible to have a second stimulus. And do that in conjunction with a medium-term binding deficit reduction plan.

And the idea would be that then you would have the markets be really confident and investors be confident, the medium term fiscal problems are going to be resolved. And they're not immediately difficult. I mean Greg talked about the bond -- U.S. bonds. People aren't worried about the credit worthiness of the U.S. today.

But you would have stimulus right now to get going the economy that we've been talking about is incredibly weak.

CROWLEY: But I can hear the Republicans saying right now, excuse me, we spent almost $800 billion trying to pump up the economy and we now have a higher unemployment rate than we did to begin with. You said growth was going to get better, it got worse. You said unemployment was going to come down. It didn't.

In 30 seconds, is that a correct analysis?

IP: It is. But we saw last December that if a package can be put together that basically hits on the sweet spots of both Republicans and Democrats, you can get something done. In a supper committee that's now trying to come up with a new deficit package, might be the vehicle that gets it done.

And the silver lining, if there is any of what's been going on in the markets, is that actually concentrates the mind on the near-term threat to the economy. That could actually be the catalyst for some cooperation in the political system.

CROWLEY: We'll see. Cooperation in the political system, we believe in miracles.

FREELAND: Greg is an optimist.

CROWLEY: Greg Ip of the Wall Street Journal, Chrystia Freeland of Thompson Reuters Digital, thank you both so much for coming.

Up next the top stories and then Fareed Zakaria GPS at the top of the hour.


CROWLEY: Time for a check of today's top stories.

Libya's government and rebels are offering very different views on what's happening in that country. The son of Moammar Gadhafi today said opposition fighters are losing every battle. He insists the Gadhafis will not leave.

But a leader of Libya's Transitional National Council says rebels have taken their fight to Tripoli and are moving toward Gadhafi's compound.

The families of two U.S. hikers sentenced to eight years in prison in Iran are asking the Iranian government to show compassion and allow them to return home. Josh Fattal and Shane Bauer were sentenced for spying and illegal entry into Iran. Their families say the men have never posed a threat to Iran.

In a written statement, Secretary of State Hillary Clinton expressed disappointment in Fattal and Bauer's sentences and she says the U.S. will continue to work for their release.

Hundreds of Egyptians gathered outside the Israeli embassy in Cairo today demanding that Israel's ambassador be expelled. The demonstrators were protesting the deaths of three Egyptian security personnel in the Gaza. They were killed by Israeli-launched rockets. The strike was in retaliation to a series of attacks on Israeli buses and cars Thursday. Egypt's government says Israel's apology for the deaths is insufficient. And those are today's top stories. Thank you so much for watching State of the Union. I'm Candy Crowley in Washington. Be sure to tune in next week for a special State of the Union commemorating the life and legacy of Dr. Martin Luther King Junior. We will be live from the site of the new memorial for Dr. King right here in Washington.

Remember, that is next Sunday right here on CNN.

But up next for our viewers here in the United States Fareed Zakaria GPS.