Transcript: Axelrod

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ABC NEWS, THIS WEEK WITH GEORGE STEPHANOPOULOS INTERVIEW WITH WHITE HOUSE SENIOR ADVISER DAVID AXELROD.

SPEAKERS: GEORGE STEPHANOPOULOS, HOST: ABC'S "THIS WEEK WITH GEORGE STEPHANOPOULOS" OCTOBER 18, 2009

SPEAKERS: GEORGE STEPHANOPOULOS, HOST DAVID AXELROD, SENIOR ADVISER TO THE PRESIDENT GEORGE WILL, ABC NEWS PAUL KRUGMAN, NEW YORK TIMES E.J. DIONNE, WASHINGTON POST PEGGY NOONAN, WALL STREET JOURNAL JAKE TAPPER, ABC NEWS.

STEPHANOPOULOS (voice-over): Good morning, and welcome to "This Week." Wall Street is back, but what about Main Street?

(UNKNOWN): I was collecting unemployment, but unemployment just wasn't enough.

(UNKNOWN): We have millions and millions of people being kicked out of their homes.

STEPHANOPOULOS: The first Republican vote for health care.

SEN. OLYMPIA J. SNOWE, R-MAINE: When history calls, history calls.

STEPHANOPOULOS: But can Democrats bridge their differences?

SEN. CHARLES E. SCHUMER, D-N.Y.: We must have a public option.

SEN. JOHN D. ROCKEFELLER IV, D-W.VA.: Leaving 16 million men and women and children uninsured is wrong.

STEPHANOPOULOS: This morning...

PRESIDENT BARACK OBAMA: I'm just getting started.

(APPLAUSE) I don't quit.

STEPHANOPOULOS: ... critical questions at a crucial moment for the president. (UNKNOWN): Why do people hate you? And...

(UNKNOWN): Why are we still being nickel-and-dimed?

STEPHANOPOULOS: Our exclusive headliner, Obama's right-hand man, senior White House adviser David Axelrod.

Plus, our expanded powerhouse roundtable, with George Will, Nobel Prize economist Paul Krugman, Peggy Noonan of the Wall Street Journal, E.J. Dionne of the Washington Post, and ABC's chief White House correspondent Jake Tapper.

And, as always, the Sunday funnies.

JEY LENO, TALK SHOW HOST: A new study shows that the phrase most often used by President Obama is "Let me be clear." The phrase he uses the least often? "Let me be specific."

(END VIDEO CLIP)

ANNOUNCER: From the heart of the nation's capital, "This Week" with ABC News chief Washington correspondent George Stephanopoulos, live from the Newseum on Pennsylvania Avenue.

STEPHANOPOULOS: Challenges just keep coming at President Obama, which gives us plenty to talk about with the man by Obama's side to deal with all the incoming, White House senior adviser David Axelrod.

Welcome back.

AXELROD: Thanks, George. Good to be here.

STEPHANOPOULOS: There -- there is so much to talk about, but it's all against the backdrop of a debate that's kind of swirling through the political world right now, crystallized by the National Journal magazine. We're going to show the cover of it right there, big picture of President Obama, the question, "Is He Tough Enough?"

Inside, they quote the historian Douglas Brinkley, who says, "Obama has created an atmosphere of no fear." And a Senate Democratic aide, "Obama's style has to be more Lyndon Johnson, half I love you, but I'll stick this screwdriver right through your heart in a second if it is to my advantage."

Is that what the president needs to do? Is it time for him to get tough?

AXELROD: Well, look, George, I think, if the president weren't tough, we wouldn't be where we are vis-a-vis trying to deal with the economy, two wars, and some -- remember what he inherited here. He walked in the door, we had the worst economy since the Great Depression. He had to take immediate steps to pull us back from what many thought might be a Great Depression. He had to sort out in Afghanistan a war where we had seven years of drift and no policy. And he passed a series of things that are going to move this country forward, from children's health care to pay equity for women, a series of things.

This Congress has passed more legislation in the first term of this president than any president in our lifetime. So I think he has been plenty tough. I think people want toughness, but they also want to have thoughtful leadership. And that -- and that requires reviewing these issues, thinking them through clearly, and bringing people along, and that's what he's doing.

STEPHANOPOULOS: So -- so you reject this argument that he has to draw more lines in the sand, twist the arms of his opponents, now tell people want he wants and expect it to get it done?

AXELROD: Let's take the issue of health care, because that's, obviously, one of the things that people are referring to. We are farther along than we've ever been in passing a comprehensive health insurance reform in this country. It's something we've discussed for 100 years.

George, you were part of the last effort in 1994, never even got a vote. We are on the doorstep of getting that done, and that's because of the approach this president has taken.

STEPHANOPOULOS: And yesterday, the president in his radio address took on the insurance industry, at least rhetorically, and he suggested that he might be willing to take away their antitrust exemption. Was he actually saying -- this has been -- the insurance industry for the last 60 years has had an antitrust exemption. Was he saying that he would sign a bill that would take that away and open the door to premium caps by the Congress?

AXELROD: Well, Congress is -- is reviewing that. He said it's appropriate that they review that.

STEPHANOPOULOS: Would he sign it, though?

AXELROD: But let's talk about -- let's talk about the insurance industry for a second, because most of the stakeholders in this health care debate are at the table, they're trying to produce real reform, because everyone knows the current system is unsustainable.

The insurance industry has decided now at the 11th hour that they don't want to go along with this. One of the problems we have is we have a health care system now that functions very well for the insurance industry but not well for the customers.

STEPHANOPOULOS: So is he saying, if they don't play ball, they're going to lose their antitrust exemption?

AXELROD: So what we need -- what we -- so we need these -- we need these reforms. In the last year -- in the last 10 years, premiums have doubled. You've seen the insurance companies take -- they -- they -- 10 years ago, 15 years ago, they spent 95 percent of their premiums on health care. Now, 80 percent. More of the money is going to bonuses, salaries, administrative costs.

This is -- this is not a sustainable path for this country. So we need reform, and that's what he is arguing for.

STEPHANOPOULOS: But if they don't join the reform effort, will they lose their antitrust exemption?

AXELROD: Well, we'll see what Congress -- we'll see what Congress does. One thing we ought to do, the House bill has in it provisions that -- that says that if they fall below a certain level of return of these medical loss ratios -- in other words, the amount of money that they spend on actual health care, that they -- they need to rebate some of that money to consumers. That seems like a good idea.

STEPHANOPOULOS: But the president wants to throw out this idea of taking away the antitrust exemption, but not willing to say today that he would sign it if Congress passes it?

AXELROD: Well, let's see how that -- let's see how that -- that goes.

STEPHANOPOULOS: Let's go on to something else. You also saw in advance in this week in the Senate Finance Committee Olympia Snowe, the first Republican to vote for the legislation, and that -- that created some -- I wouldn't call it a backlash, but some grumbling among some Democrats, including Congressman Raul Grijalva in the House. (BEGIN VIDEO CLIP)

REP. RAUL M. GRIJALVA, D-ARIZ.: I think it is a waste of time for the White House and to some extent for leadership to continue to cater to one vote.

(UNKNOWN): We can't sort of hedge and say, "What's Olympia going to do?" We've got to decide what we want.

(END VIDEO CLIP)

STEPHANOPOULOS: They're saying, particularly on this question of the public health insurance option, the president should listen to the majority of Democrats who want a public option, not this single Republican vote who doesn't.

AXELROD: Look, the president has very consistently and clearly articulated his support for a public option. He thinks that having competition within the health care system is healthy. There are some markets where one insurance company can dominate 90 percent of the market. We see that in some states. So he supports that.

But -- but that doesn't mean that we -- we halt the process. There are people in the Senate -- Republicans and Democrats -- who have objections to that. We have to work through these issues, and we're going to do that. The important thing is to create... STEPHANOPOULOS: But someone is going to have to blink, aren't they?

AXELROD: The important thing is to create a situation for consumers in which they have choice, there's competition, they get the best deal, and that's what we're after.

STEPHANOPOULOS: Who's going to win this fight, the House Democrats or Olympia Snowe?

AXELROD: Well, we'll see. I think that we -- here's what I believe, George. I believe that there is a fundamental belief on the Hill at this time that we can't fail now, that we've come this far, the country wants us to act, this is a problem that we've -- that's lingered for too long, and we're going to solve it.

And I think that will will overcome these differences. There will be compromise. There will be legislation, and it will achieve our -- our goals, helping people who have insurance get more security, more accountability for the insurance industry, helping people who don't have insurance get insurance they can afford, and lowering the overall cost of the system.

STEPHANOPOULOS: But you can't say today that the final bill that the president will sign must include a public option, as called for by House Democrats?

AXELROD: I think the final bill will achieve those goals, and a public option would help in that regard.

STEPHANOPOULOS: Let me also get at the question of how to pay for all this, because that is one of the -- the toughest issues to solve here. And the Senate Finance bill got about $200 billion from this excise tax on -- on -- on high-priced health insurance plans, but a coalition of organized labor and about 178 House Democrats have said this is going to be a middle-class tax increase on people who have insurance.

Here's what the -- the unions wrote. They said that 40 percent -- the enormous tax would soon hit 40 percent of all plans. Mostly likely to be hit: plans with people who are older or sicker or those who work for small employers. That's not the change America voted for. A new tax on the middle class is unacceptable.

Does the president agree with those unions who say that this excise tax is a middle-class tax increase?

AXELROD: Well, the analyses of this have suggested otherwise, that the bulk of it is not going to hit middle-class people. Because in his -- in his -- in his...

(CROSSTALK) STEPHANOPOULOS: ... percent.

AXELROD: In his campaign, as you know, he opposed John McCain's proposal to completely eliminate the -- the tax exemption on -- on health care benefits. And he still believes that. But this -- this is a tax on insurance companies, a fee on insurance companies on high- end policies. Everyone agrees that it'll help lower the growth in health care costs, and it will help contribute to the reform we need.

STEPHANOPOULOS: But the...

(CROSSTALK) AXELROD: But having said that, George, the president has -- we're going through a process. The House has its proposals. The Senate has its proposals. We will pass bills in both -- in both chambers. We'll go to a conference, and we'll hammer these issues out.

STEPHANOPOULOS: Let me -- let me just press this one more time, because it was -- this was not just any analysis. This was the Joint Committee on Taxation. This is a bipartisan, bicameral body in the -- in the House and the Senate, and they say that this is going to hit 40 percent of all plans. That is going to reach in to the middle class. If it does, would the president sign it?

AXELROD: Well, let's see what -- I think that this thing is going to be adjusted as we go along, so let's see what the final proposal says before we talk about what the president will or won't sign. The president is going to sign a bill that will provide greater security for people who have insurance, that will help people who don't have it get it, and will lower the overall cost of health care. And if it doesn't meet those standards, then he won't sign the bill.

STEPHANOPOULOS: The president has drawn one other very red line in the sand, that he won't sign any health care bill that increases the deficit.

(BEGIN VIDEO CLIP) OBAMA: I will not sign a plan that adds one dime to our deficits, either now or in the future. (APPLAUSE)

I will not sign it if it adds one dime to the deficit now or in the future, period. (END VIDEO CLIP)

STEPHANOPOULOS: Yet just this week, the Senate majority leader, Harry Reid, is going to bring a bill to the floor that -- Republicans call this the first installment on health care, which is going to permanently repeal savings gotten from payments -- Medicare payments to doctors, $248 billion over 10 years. Must that be paid for, for the president to sign it?

AXELROD: George, first of all, understand that that -- when the Republicans say this is the first installment on health care, it's not part of the health care bill. This -- this has been -- there's been...

STEPHANOPOULOS: It was in the House bill.

AXELROD: Yes, but the point is that, every year, this -- this provision of the Medicare law goes into effect. Every year, draconian cuts are proposed for doctors that would have a deleterious effect on patients. And every year, the Congress acts on it and defers on that. And the fact is, it's a charade.

Everyone in the Congress knows they're not going to let that go forward. All that we're saying here is, let's be honest about it. The president provided for it in his budgets, and we ought to acknowledge that this is a -- this is an ongoing expense that we'll have to meet.

STEPHANOPOULOS: But isn't it actually -- isn't it also a charade if you're saying, "We're going to do this. We're not going to pay for this $248 billion," and that's the only way you can end up not increasing the deficit... (CROSSTALK)

AXELROD: Well, it will be -- it will be part of the budget. It will be paid for as we move -- as we move forward. The fundamental health reform, George, that we're talking about that would provide subsidies to people who can't afford health care today and ancillary expenses are all going to be paid for.

STEPHANOPOULOS: But will -- would this particular bill have to be paid for? Because the House -- Speaker Nancy Pelosi has said that she's not going to pass it through her chamber unless there are specific things... (CROSSTALK)

AXELROD: As I said, the president's provided for it in his -- in his budget, and we will account for it. STEPHANOPOULOS: Let me ask -- on this question of the deficit, another question about jobs. We saw a $1.4 trillion deficit announced on -- on Friday. And I know that you're not ready to say the president -- which proposals the president specifically is going to look at now to help create new jobs in the future, but just as a matter of principle, does the president believe right now that this problem of 9.8 percent unemployment has to take precedence in the short term over reducing the deficit? And so is he open to more job- creation measures?

AXELROD: Yes, look, we -- when we came to office, we were handed two problems. One was the $1.2 trillion deficit, and the other was the worst economic crisis since the Great Depression. We have to solve that economic crisis. We have to get the economy moving.

We've made some progress. There's an anticipation that there may be growth in the third quarter. We've slowed the -- the -- this catastrophic loss of jobs significantly. We have to turn that around. And that is a priority.

I think history shows us that the worst mistake you can make is to pull out of your -- your recovery efforts too early, because you could send the economy cascading backward into a recession, so that has to be a priority, but that doesn't mean that we don't look to the mid- and long term for deficit reduction.

The president is going to be addressing this at some length in the -- in the State of the Union... (CROSSTALK)

STEPHANOPOULOS: But the deficit may go up...

AXELROD: ... have to...

STEPHANOPOULOS: ... before it comes down, in order to create jobs.

AXELROD: Well, we need to account for the things we're doing. We have a stimulus program in place, an economic recovery program in place, that is not even 50 percent through. We have to see that through. And we'll see what other measures we need to take.

STEPHANOPOULOS: Let me also ask you a question about Wall Street. We saw Wall Street for about -- for a moment this week top 10,000 on the strength of some pretty stunning earnings out of big banks, like JPMorgan and Goldman Sachs. And we've also seen now that Goldman Sachs is likely to pay out more bonuses this year, $23 billion, than it did at the peak of the market, in 2007.

Here's what the president had to say about bonuses back in January. (BEGIN VIDEO CLIP)

OBAMA: There will time for them to make profits, and there will be time for them to get bonuses. Now's not that time. And that's a message that I intend to send directly to them. (END VIDEO CLIP)

STEPHANOPOULOS: So is it OK with the president now for banks like Goldman Sachs to pay the biggest bonuses ever?

AXELROD: Well, look, the bonuses are offensive. And to the -- for the firms that still have federal TARP money, there's some jurisdiction. The paymaster at Treasury is -- is working on that, to try and limit that. You've seen a lot of firms go to stock rather than cash, so at least people have a stake in the success of their company and they're not just walking away with cash, making short-term decisions that are bad for their institutions and the economy.

But here's the bigger thing, George. The most offensive thing is, we haven't seen the kind of increase in lending that -- that we should.

There are a lot of small businesses, creditworthy businesses around this country who still can't get the capital they need to grow, which is important for our economy, and you've seen these same institutions spend tens of millions of dollars lobbying the Congress to -- to try and -- and stop financial regulatory reform, to stop the kind of reforms that we need to prevent the disaster we just saw and to protect consumers. And that -- that is most offensive.

And the thing the president, his priority right now is to pass that financial regulatory reform, defeat the lobbyists for the banks...

STEPHANOPOULOS: But what does the president...

AXELROD: ... and do what's right for the country.

STEPHANOPOULOS: What does the president say to Goldman Sachs right now about those bonuses?

AXELROD: Well, they ought to have -- they ought to -- first of all, we have, as I said, limited sway other than moral suasion with some of these -- a lot of these institutions. STEPHANOPOULOS: They are getting an awful lot of money from the Fed.

AXELROD: They ought to -- they ought to -- they ought to think through what they're doing, and they ought to understand that, a year ago, a lot of these institutions were teetering on the brink. The United States government and taxpayers came to their defense.

They have responsibilities. They ought to meet those responsibilities. And they ought to express them by increasing lending, which is what we need right now, and by standing down and allowing the kinds of reforms we need to protect consumers and protect the country from the sort of disaster we've seen.

STEPHANOPOULOS: And rethink the bonuses?

AXELROD: Well, they should do that. I think that -- I think what they need to understand is, on the same day that you saw stories about these bonuses, you saw a story about how wages are at a 19-year low. The American people have limited -- limited tolerance for this. They want -- they don't begrudge success, and we ought not to be in the business of micromanaging how companies compensate their people. But they ought to do the things that they should to help this country, and that's lending, and that's -- and that's standing down on financial regulatory reform and letting -- letting us move forward on the reforms we need.

STEPHANOPOULOS: Final question. Your colleague, Anita Dunn, told the New York Times this week that Fox News was undertaking a war against the White House and said the White House would treat Fox the way we would an opponent. Here's what Rupert Murdoch had to say about that.

(BEGIN VIDEO CLIP)

RUPERT MURDOCH, NEWSCORP: There were some strong remarks coming out of the White House about one or two of the commentators on Fox News. And all I can tell you is it has tremendously increased their ratings.

(END VIDEO CLIP) STEPHANOPOULOS: That does seem to be true. Are you worried that your strategy is fortifying your enemy? AXELROD: Well, I don't -- you know, I'm not concerned. Mr. Murdoch has a -- has a talent for making money, and I understand that their programming is geared toward making money. All -- the only argument Anita was making is that they're not really a news station, if you watch -- even -- it's not just their commentators, but a lot of their news programming, it's really not news. It's pushing a point of view.

And the bigger thing is that other news organizations, like yours, ought not to treat them that way, and we're not going to treat them that way. We're going to appear on their shows. We're going to participate, but understanding that they represent a point of view.

STEPHANOPOULOS: OK. David Axelrod, thanks very much.

AXELROD: Good to be here.

STEPHANOPOULOS: We're going to go straight to the roundtable. So as our panelists take their seats, take a look at how "Saturday Night Live" handled the toughness question.

(BEGIN VIDEO CLIP)

(UNKNOWN): So are you going to get angry with them?

ARMISEN: Now, Katie, no. You know I don't get angry.

(UNKNOWN): It's not that we want health care to fail. We don't. We just want you to fail.

(UNKNOWN): Oh, my god. What happened?

(UNKNOWN): When you make him angry, he turns -- he turns into "The Rock" Obama.

(END VIDEO CLIP)

STEPHANOPOULOS: And with that, let me bring in the roundtable. I am joined, as always, by George Will, Peggy Noonan of the Wall Street Journal, our chief White House correspondent, Jake Tapper, E.J. Dionne of the Washington Post, and Paul Krugman of the New York Times.

And, George, you just -- you heard David Axelrod deal with this question, which really has picked up here in Washington and -- and around the country. Does the president have to do more to demonstrate toughness?

WILL: I hope not, because -- we have a record on this, and that is, when Jack Kennedy, President Kennedy, in his first year, went to Vienna and was treated badly by Khrushchev, he came back and told James Reston of the New York Times...

STEPHANOPOULOS: Khrushchev cleaned his clock.

WILL: He was rude to him and dismissive, contemptuous. Kennedy was shaken, came back and told Scotty Reston he had to find somewhere to be tough, and he picked Vietnam. Now, the danger is that this narrative about him not being tough enough occurs in the midst of, A, the argument about Afghanistan, where to prove you're tough, you might want to escalate, and, B, when he has to make a decision about the public option. One thing he could do is jettison the public option, offend his left and make himself look moderate, but can he offend his left on the public option and escalate in Vietnam -- in Afghanistan?

(CROSSTALK)

STEPHANOPOULOS: So the question is, how does he show his toughness? It does appear to be, E.J., that most of this on pushing to be tougher is coming from liberal Democrats, particularly in the House?

DIONNE: Well, actually, it's coming from two places. It's also coming from neoconservatives and others who say he needs to be tough on foreign policy. And let's take it there first.

I mean, the notion that -- he speaks softly, but sends in the drones. I mean, if you look at what he's done in foreign policy, he's gone after Al Qaida in Pakistan, in Indonesia, in Somalia. He went after those pirates. That wasn't actually an easy decision. We forget about that.

STEPHANOPOULOS: Could have gone badly, really badly.

DIONNE: And it takes a lot more toughness to say to your generals, "No," or, "Tell me why you really want to do this," than it does to go along with the generals. So I think on that front, it's wrong.

Yes, on domestic policy, you could say he could get tougher on Wall Street. He let a lot of the attacks on health care go in the summertime, and that hurt him, but I don't think that's about toughness. That was strategy and tactics. LBJ, they say, "Be like LBJ." He had 295 House Democrats, 68 Senate Democrats. He could avoid...

STEPHANOPOULOS: It was very different.

DIONNE: It was a lot easier for him.

STEPHANOPOULOS: Peggy, then Paul?

NOONAN: I think it is an old cliche in Washington that a leader, a president must be both feared and revered. I think this president's problems don't have to do with his personality and fearsomeness. I think it has to do with policy issues.

I think the Democrats who are talking about his weakness are not able to see that the president has made some policy judgments that are problematic. I think they -- they just sort of don't see it and the president's weakness has to do with policy judgments. If his political judgment were more respected, I think he'd be in a better position. But it's not that people don't fear him.

KRUGMAN: Two things. First, I think a lot of people are basically just complaining that he's a Democrat. You know, this -- it's -- you know, Will Rogers, more than 70 years ago, said, "I am not a member of any organized political party. I'm a Democrat." I mean, Democratic presidents can't lead the same way Republicans can.

STEPHANOPOULOS: And they let the process work its way through.

KRUGMAN: Right. And so there's some of that. Now, this complaint, this is a weird time to be holding this narrative forth, right? I mean, in the spring, when they were going easy on the banks, when they were sort of low-balling the stimulus, that's a time when you could say, "Well, you know, he's not being tough."

But right now, he's about to get the health care reform. He's about to get the biggest change in our system since -- since Medicare. That's not the mark of a president who's showing himself insufficiently tough. Sure, he doesn't swagger. He doesn't say, "I'm going to get -- I'm going to get Osama bin Laden dead or alive," and, eight years later, neither, you know, this is -- he's not talking tough, but he's actually getting stuff done now, which is what matters.

STEPHANOPOULOS: Jake, David Axelrod kept his cool under the question. He just sort of brushed it off. But this -- this is a narrative that kind of irritates the White House. Do they think they have to do anything about it?

TAPPER: No, I don't think so. What you hear from -- from them, when you ask them about this narrative, is, yes, we've heard this before. Is he tough enough to beat Hillary Clinton? Is he tough enough to beat John McCain? I think they think that they proved -- I think empirically they proved that -- that he was able to do both those things.

I will point out, in addition to the pirates, there are a number of people associated with the car manufacturer restructuring, both Rick Wagoner, who was deposed, and a lot of the people who own stock and bond in those car companies who would say that this White House was perhaps bullying.

That said, there are a number of Democrats on Capitol Hill who want the president, if not to be tougher, to at least be clearer about what he wants. Now that the five bills have passed committee, they want President Obama to say, "This is what I want, and this is not what I want." They are calling out for that sort of leadership.

STEPHANOPOULOS: And it's -- and it's pretty clear David Axelrod at least in public is not prepared to do that yet, even though Rahm Emanuel is in all of the meetings in both the House and the Senate.

I want to come back and talk about that and the economy. And we might even get a little balloon boy after this break.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

(UNKNOWN): We're about to hit 10,000. I mean, do you hear...

(CROSSTALK)

(UNKNOWN): Here we go.

(UNKNOWN): Here we go.

(UNKNOWN): You should put your hats on, guys.

(UNKNOWN): You should put your hat on now.

CAVUTO: Ten-k is back.

(UNKNOWN): A blockbuster day on Wall Street. The Dow back about 10,000.

(UNKNOWN): The Dow Jones Industrial Average hit 10,000 this afternoon.

KUDLOW: It is a milestone.

(UNKNOWN): It's really one of the most remarkable rallies we've ever seen on Wall Street.

(UNKNOWN): It's an amazing snap-back.

(UNKNOWN): When you see people beating raised forecasts, that's good news.

(END VIDEO CLIP)

STEPHANOPOULOS: Now, it didn't last long. The Dow slipped back to 9,995 on the final day, but still a huge gap between Wall Street and Main Street. We want to talk about that now on the roundtable with George Will, Peggy Noonan of the Wall Street Journal, Jake Tapper, chief White House correspondent, E.J. Dionne of the Washington Post, Paul Krugman of the New York Times.

And, George, we did see something pretty remarkable this week, that that 10,000 barrier blown through again, not the kind of celebrations you saw -- like we had back in 1999, but a remarkable comeback for the Dow in the face of persistent long-term, high unemployment.

WILL: That's right, and it persists. That's the problem, is that once the country decides that there's a disconnect between what -- what the stock market does and what the job market does, it seems to me you're going to have great difficulties. And the -- the administration -- I'm not sure what's left in its quiver to throw at this problem.

I am the only one of the six of us -- I'm about to get $250 from the government as part of this super entitlement. I'm entitled...

STEPHANOPOULOS: That's the -- the Social Security.

WILL: ... to a cost-of-living adjustment to Social Security. You're entitled to that when the cost of living goes up, and you're entitled to this entitlement when you're not entitled to it. It's the ultimate expression of our culture.

STEPHANOPOULOS: And that -- and that, Paul, I think the president believed that there's no way he could get health care through if he didn't do that. But on -- on the economic question, Alan Greenspan has said several times that this run-up in the Dow in and of itself is an economic good, that it's going to create a feedback loop that will start to really feed in to the economy, but we're not really seeing it yet.

KRUGMAN: Well, you know, actually the economy, if you measure it by stuff produced, is growing. It's probably growing at 3 percent to 4 percent annual rate. So if you're look at industrial production, it's growing at a more than 5 percent annual rate. What's not growing is jobs.

So we actually are seeing, you know, by -- by the standard of, is GDP going up? The recession is over. The economy's growing. So there is a disconnect between even the real economy and the job market. It -- the stock market will help.

STEPHANOPOULOS: What's...

(CROSSTALK)

KRUGMAN: We're not that sure. You know, we're -- partly, it looks as if businesses are really being reluctant to hire because they don't trust the recovery, little bit like all of us. They don't really trust the recovery.

But there is -- unemployment is higher than it should be, given the state of GDP, given the state of industrial production, so something is a little bit funny here. All that the White House can hope for is that, whatever the mystery factor is, it goes away in -- in the next year or so.

But, look, I mean, this is not the worst situation we've seen. We stepped back a couple of feet from the edge of the abyss. But we've got to see that job growth. And the -- the White House has got to do something to make it happen.

STEPHANOPOULOS: And it seemed pretty clear, E.J., that David Axelrod was signaling that the White House was prepared to do more, even if it meant another short-term increase in the deficit.

DIONNE: Yes, they're going to do a second -- depending on how you count them -- or a third stimulus, and they're not going to call it that. They may even do it piecemeal.

They face -- this is a case where their political interests and their economic interests coincide. They do not want to be going into next year's election in November with unemployment where it is now or going up, and so they need to do something about it.

And substantively, it's very bad for the country. It has long-term effects to have that much -- that many people in the country unemployed over the long term. And you've got a problem where a lot of employers have people on short hours, so they're going to put those people on full-time before they take on new employees, so they've got to do something.

NOONAN: It almost looks like to me, hitting 10,000 this week, as if New York or Wall Street has its own reality based on its own forecasts and America has a wholly different reality. It seemed to me there was a greater detachment between the country and -- and Wall Street this week.

We can all guess about what's behind the 10,000, but it could not be more serious that unemployment is expected by everybody, not just at this -- on this table, but everybody, to either stay high or go up. That would give everybody in the America the jits (ph).

But beyond that, I think the biggest thing giving everybody the jits (ph) and a sense of uncertainty and a sense that they don't want to hire or expand is this sense of debts and deficits, this sense that their country -- people understand the moment their nation is in. They have a sense of a trajectory, and they're not happy about it.

STEPHANOPOULOS: But that's what creates the dilemma. That is precisely what -- I -- I couldn't agree with you more on the politics of that. I think the country is very angry about it. Yet when you look at the economics, not only Paul Krugman, but, you know, Fed Chairman Ben Bernanke say the biggest mistake people made during the Depression was to worry about the deficits too singularly.

KRUGMAN: Let me say something. There's -- there's something that -- there was, I think, a little bit of bad reporting. When we got that $1.4 trillion deficit number, that was terrible, but it was actually $400 billion below what people were forecasting just a few months ago. The deficits are actually -- the surprises on the deficit are actually...

(CROSSTALK)

KRUGMAN: ... on the downside.

STEPHANOPOULOS: ... world-record deficit.

(CROSSTALK)

KRUGMAN: I know. I know, but the fact of the matter is that...

NOONAN: Three times bigger than ever.

KRUGMAN: ... that -- that if we were sort of, you know, dealing with, relaxed with the prospect of a $1.8 trillion deficit a few months ago, we should not be panicking, pulling back on stimulus, pulling back on support for the economy, when the actual deficit comes in $400 billion less than you were thinking it was.

STEPHANOPOULOS: And, Jake, do you agree the White House is not going to be cowed by this, that they are prepared to put much more on the table in stimulus?

TAPPER: Yes, they're talking about tax credits for job creation. But they have a problem coming up at the end of the month, the state job numbers created from the stimulus package, the $143 billion that's been spent. Those actual numbers, auditable jobs, those numbers will come out, and they will be much less than the 1 million jobs the administration says have been created. Of course, they're using -- using different ways of calculating this.

(CROSSTALK)

TAPPER: No, I know. But I'm just saying, perception-wise, the administration's talking about jobs directly created and indirectly created, you know, the people that make the -- the pavement that the workers who are directly paid by the stimulus pave with, et cetera, the people who give them sandwiches.

But the state jobs numbers are going to be much lower, and they know that they have a problem here, because $143 billion, even though that's ahead of schedule, that money, because this stimulus was to go out, and -- throughout the two years, and not just one big chunk, they know that there is an impatience among the American people and even among Democrats on Capitol Hill that want more jobs more quickly.

STEPHANOPOULOS: But they can't, George. They're not going to come out with huge new proposals. I think E.J.'s right. They're going to go for piecemeal proposals after they expect, they hope, passage of -- of health care. Are you as confident as Paul is that this is done for this year, this is going to get done, health care reform?

WILL: No, I'm not. I'm very puzzled by the argument about how we're going to pay for this, which seems to be the big problem right now. This is a government that right now is borrowing 43 cents of every dollar it spends. We're going to pay for this the way we pay for everything. We're going to borrow the money from the Chinese.

STEPHANOPOULOS: The president says we're not. He says if it increases the deficit, he's not going to sign it.

WILL: I know...

(CROSSTALK)

WILL: ... sentences that begin, "The president says," are not as impressive as they used to be. They're going to -- they're supposed to pay for this by taxing the Cadillac plans, the rich insurance plans. They're not going to do that, or at least they're going to scale it back a great deal. They're going to increase access to Medicare. They're going to increase access to -- to Medicaid.

What's going on now is the Baucus bill is being melded with the Dodd bill, and all the melding moves it to the left, makes it more expensive.

STEPHANOPOULOS: But...

DIONNE: But moving it to the left does not automatically make it more expensive. In fact, what a lot of the progressives want to do is to figure out how to hold down the costs by holding down what you pay out to the insurance companies.

Secondly, if they weren't paying for this, this would be a whole lot easier. It was a lot easier to pass a prescription drug benefit under President Bush, because they never paid for that, adding $800 billion to the deficit. One of the big problems they're having is to figure out, who is going to pay for it? So you've got the fight about the Cadillac plans. Or do you do it by taxing the rich or various other proposals? So they are paying for this thing.

STEPHANOPOULOS: The complaint about the Cadillac plans -- it's true. But I think, in some ways, that's the most important fight right now, $200 billion. It not only helps gets your deficit number, but it also is probably one of the biggest drivers of actually controlling costs over the long term.

Yet, Paul Krugman, it is clear that when you've got every single major union and 178 House Democrats saying they're not going to go for it, then it's not going to pass.

KRUGMAN: So they'll adjust it. It'll -- you raise the threshold at which that tax cuts...

STEPHANOPOULOS: So it doesn't hit the middle class.

KRUGMAN: That actually -- that exempts a lot of people, while not cutting the amount of money you raise that much. That's one of those things where you just look at the way it works.

And, you know, $200 billion is not really a lot of money over 10 years, right? You have $200 billion here, $200 billion there, and soon you're talking about real -- but $200 billion is actually, relatively speaking, pocket change. There's lots of way to raise that much money. I don't think this is an obstacle.

STEPHANOPOULOS: Wait a second. I mean, you say there's lots of ways to raise that much money. We've been sitting here for six months throwing out ideas.

KRUGMAN: Because we know that somebody's going to pay it and the argument is about who, and it's not really an argument about whether. It's an argument about who pays.

WILL: Yes, and we know the answer to that. It's our children, because at the end of the day, we're going to borrow it from the Chinese.

KRUGMAN: No, not going to do it.

DIONNE: Do you know what the problem is, is that it's perfectly -- just to go back to the economy -- it's extremely rational to run big deficits when we need the stimulus from the government. What they can't do is to say, look, we're going to do that now and then we're going to pay for it later, and here are some tax proposals that will kick in down the road. And politically right now, it's poisonous to say we're going to spend money now and have tax increases later, but that is how we're going to do it in the end, even though I don't think they're going to say so.

STEPHANOPOULOS: Meanwhile, Peggy, Olympia Snowe became the most powerful Republican in Washington, at least for a week. And what's your sense? You know, she -- she stayed in the game throughout these -- all these negotiations. Most Republicans were betting she would vote no, but in the end, she decided to keep her seat at the table. Is this something where, if the bill starts to move in the direction of the House Democrats, does she succumb to this feeling that David Axelrod was talking about, "We've just got to pass something"? Or do you think she'll have the strength and -- is she willing to then switch her vote, go no?

NOONAN: Well, she said, when history calls, history calls, you know, which is one of those sort of...

WILL: Totality.

NOONAN: ... yes, but also has a sort of portentous sound. I guess everybody will be focused on her now and wondering if, as the Baucus plan bill becomes the Baucus the final votable bill, what she will do.

I think the great insight this week from anybody in Congress about the health care plan as it exists now is Congressman Paul Ryan's simple statement.

STEPHANOPOULOS: Republican of Illinois.

NOONAN: Republican of Illinois, House...

WILL: Wisconsin.

STEPHANOPOULOS: Wisconsin, sorry.

NOONAN: Wisconsin, sorry, House Banking, who said, look, they're going to pass this thing. It's going to be cut down, it's going to be CBO-neutral, and then they're going to add on everything they cut. It's going to cost a lot of money.

STEPHANOPOULOS: Well, and that is -- we're seeing this, this week with this Medicare...

TAPPER: Yes, I mean, they're -- they're...

(CROSSTALK)

STEPHANOPOULOS: ... that was part of the 1997 budget balancing act.

TAPPER: ... $247 billion in Medicare to -- to repair the fact that doctors now get -- are paid according to regular inflation and not health care inflation, $247 billion. That is separated from this health care bill so that the health care bill is under $1 trillion. And now, you could argue this is a fix that would happen whether or not there was a health care bill. But at the same time, it's -- it's impossible to argue that this $247 million going to doctors is not part of health care reform. It is.

WILL: How do you say "a quarter of a trillion dollars" in Chinese?

(CROSSTALK)

KRUGMAN: I will say that, at the margin -- at the margin, this money is not coming from the Chinese. We're actually borrowing a lot less from the Chinese when -- when we were. So that's -- that's an easy line. I've used it myself.

WILL: That's in real terms?

KRUGMAN: But it's not actually a good story here now.

WILL: That's in real terms? Or that's...

(CROSSTALK)

KRUGMAN: That's in real terms, that's all around, and because, basically, our borrowing needs as a country have dropped, despite those federal deficits.

STEPHANOPOULOS: But how about the broader criticism? Because, again, that -- I think this Medicare issue is -- is -- is telling. That was the way that members of Congress said they achieved a balanced budget back in 1997. And for a time, we actually had a surplus before the Bush tax cuts. But every single year for the last four, it has been undone, and it makes people skeptical of the savings that are promised in this bill.

KRUGMAN: Well, sure. But, you know, the point is, though, that this is -- this is actually what health care reform is ultimately supposed to bring you around to being able to address. And I know that's a long road.

But what we know from international experience -- remember, we have -- we're the only country that doesn't, among the advanced world, that does not have universal coverage. We also have, by far, the highest costs.

All the evidence suggests that the root to effective cost control runs through universal health care, that once you make it a national responsibility that everybody's going to be covered, once you no longer have the safety valve of dealing with runaway health care costs by just throwing more people into the abyss, then you actually come to confront the health care costs.

So I don't think you want to think of this as an argument against health care reform. You want to think of this as an argument for it.

STEPHANOPOULOS: To do it right. Let's -- let's turn to the politics now. We've got three special elections, three big ones coming up this year. We've got the governors races in New Jersey and Virginia, also a special House race up in northwestern New York.

And -- and I want to show the Democratic candidate for governor in Virginia, Creigh Deeds, a big ally of President Obama. Virginia went for President Obama last year, but he is not highlighting his ties in his campaign ads.

(BEGIN VIDEO CLIP)

DEEDS: Frankly, a lot of what's going on in Washington has made it very tough, and we had a very tough August, because people were just uncomfortable with the spending. They were uncomfortable with a lot of what was -- a lot of the noise that was coming out of Washington, D.C.

(END VIDEO CLIP)

STEPHANOPOULOS: This is the race, George, that Democrats most likely to lose. There's been a Democrat governor, but the Republican, Bob McConnell, pretty -- has a pretty healthy lead right now.

WILL: Republicans expect to win that. Republicans believe that Congressman Castle of Delaware, who's decided to leave the single seat -- he runs at-large in Delaware -- and run for the Senate, that he would not have done that if things hadn't shifted dramatically in the Republicans' favor, one measure of which is this. In the generic ballot, "Do you prefer Republican or Democrat?" it's now dead even between the two parties. And among independents, Republicans are up 9 percent.

STEPHANOPOULOS: And that is a big change, E.J.

DIONNE: Well, the big problem for Deeds, he has two problems. One is that, during the summer, Democratic numbers in Virginia really dropped sharply, just generic support, identification with the Democratic Party, that hurt him. He also, you know, spent everything in the primary and really wasn't present in the summer. He reorganized his campaign.

And he's got a problem vis-a-vis Obama, which is that he is counting on some conservative Democrats in his southwestern part of the state. He doesn't want to get too close to him. But he needs Obama to turn out young people and African-Americans.

But to go to George's point about Mike Castle, Republicans have a real problem, because to win some of these seats, such as Delaware, they need moderate candidates, like Mike Castle, but look at that race in upstate New York.

STEPHANOPOULOS: The House race.

DIONNE: The special election for the House, where the Republicans nominated a moderate Republican, Dede Scozzafava, and then the Conservative Party in New York state put up a right-wing candidate supported by the tea baggers. That right-wing candidate is cutting into the moderate's votes, and the Democrat is ahead in a district that is very Republican. That's a real challenge long term for the Republicans. Can they nominate moderates?

STEPHANOPOULOS: E.J., he brings up an important point. Now, Stan Greenberg and James Carville did a study this week of the Republican base of voters. And one of the things they found out, this hardcore part of the base is in a world unto its own right now, the tea bag movement. And, you know, they're sort of driven by the idea that President Obama, the Democrats, have a secret plan to impose socialism on the country.

NOONAN: Well, I don't know about that. You know, in the case of New York, the conservative, who is making real inroads and threatening the official Republican nominee, that conservative's voting record has more in common with the fellow who just left that office than the Republicans' does. I can't help but think a lot of this stuff is -- is exaggerated, in terms of calling it "tea baggers" and all that stuff.

Look, this country saw this summer an awakening, if you will, an August awakening, of people at town halls coming forward, Republicans and independents and some Democrats, saying, "Wait a second. We're not liking the way they're doing it right now in Washington." That is creating, I think, something of a wave that perhaps, if Virginia and New Jersey seem to be going Republican, may lead to something serious in 2010.

I mean, E.J., there were 49 congressmen who are up for re-election in 2010 who are Democrats who came from districts that McCain won, so that shows you, in a way, how delicate things are for them.

STEPHANOPOULOS: And it goes up to 82 if you add McCain and Bush and calling...

(CROSSTALK)

DIONNE: ... Republicans from Obama districts.

TAPPER: Virginia's a bad bellwether, though, because it -- since 1973, it always switches party from that. I mean, George W. Bush could not have been more popular in November 2001, and the Democrat won the governor's office.

STEPHANOPOULOS: I think that's a good point. I think that the bigger concern for the White House and for Democrats is looking at this wave that Charlie Cook, probably the best political analyst of House races, has said could be coming.

And, Paul, that all does come back to this whole question of unemployment. It's hard to imagine Democrats not facing a wave if you're looking at unemployment topping 10 percent next summer.

KRUGMAN: A couple things. First, the generic congressional ballot. We actually -- political scientists have looked into, what can you infer from that at this point in an election cycle? And the answer is nothing. It has no predictive value.

What does have some predictive value are two things, the popularity of the president, and if you want...

STEPHANOPOULOS: Still above 50 percent now.

KRUGMAN: Yes. If you look at Obama's numbers now, they look like Bush at this point in 2003, not like Clinton at this point in 1993. So, actually, Obama is not remotely in the position that Clinton was in, very unlikely to lose the Congress.

The other thing is the state of the economy. And, yes, if the unemployment rate is still rising as we go into late 2010, then we've got a problem.

STEPHANOPOULOS: But, see, you actually -- you just brought up an important point. The absolute number may not be, E.J., what's most important. It could be the trend as we move from the summer to the...

KRUGMAN: The trend, if it's falling. If it's falling, then -- then the Democrats are in fine shape.

DIONNE: But you're looking -- you can look at '94, which was a Republican sweep. You can also look at 1982. Unemployment hit 10 percent about a week-and-a-half, two weeks before the 1982 election. The Republicans lost ground, but they held. They lost 26 seats in the House. And I think there is a good chance that, if this is a bad night for the Democrats, it will be more like '82 was for the Republicans than like '94 was for Bill Clinton.

STEPHANOPOULOS: I think that's probably right. We just have a couple of minutes left, and I can't leave without talking for a second about this issue that gripped -- and I shouldn't say issue, the story that gripped the nation on Thursday afternoon watching that flying saucer...

NOONAN: Oh, yes, you could.

(LAUGHTER)

STEPHANOPOULOS: Well, I want to bring it to you. But we just -- what we saw with this -- you know, the -- the flying saucer go off, the family all across morning television the next day. Now we're hearing that they're likely to have charges pressed against the family for perpetuating a hoax. And -- and, Peggy, I was just wondering what your thoughts on -- what do you think this says about the country, about the media? Do we pay too much attention...

(CROSSTALK)

TAPPER: We're all living a nightmare out of Paddy Chayefsky's dreams.

KRUGMAN: And -- and -- and inflation is still a danger.

NOONAN: Oh.

TAPPER: That's...

NOONAN: It is a rich and varied nation. We have many interesting individualists living here. I think the disturbing thing we saw, probably, was interesting parenting styles with regard to the poor little kid who -- who seems to have been problematic within his family and got sick on live TV.

STEPHANOPOULOS: He got sick on live TV, George Will. And Diane Sawyer actually had to tell the parents, do you want to go take care of your kid?

WILL: First thing's first. We walk into this studio every Sunday morning past a big inscription on the wall outside from Richard Nixon that says, "The American people don't believe anything until they've seen it on television." There just has to be a coda, "Don't believe what you see on television." We'll be all set.

DIONNE: You know, I like the idea of moving from car chases to balloon chases, but as soon as you exploited the kid, you said, oh, my god, you took this delightful story and turned it into a terrible story.

NOONAN: Yes.

KRUGMAN: No further comments.

STEPHANOPOULOS: He's going to say inflation is still a danger when we --you folks go into the green room. You can all check it out later on abcnews.com. And you can get political updates all week long by getting our daily newsletter, which is also on abcnews.com.

END

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