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STATE OF THE UNION WITH JOHN KING

Economy and Stimulus; Examining Caterpillar in Tough Times; Daschle's Tax Troubles

Aired February 1, 2009 - 20:00   ET

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


JOHN KING, CNN HOST: I'm John King and this is our State of the Union report for this Sunday, February 1st.

This week 100,000 people were laid off across the country. Is the $800 billion stimulus bill moving through Congress the right answer? We will talk with two state governors who are dealing with the reality and the tough times for tight budgets. Republican Tim Pawlenty of Minnesota and Democrat Jennifer Granholm of Michigan.

The famous political analyst Yogi Berra said it best, it is like deja vu all over again: another of President Obama's Cabinet picks neglected to pay all the taxes he owes. Can Senator Tom Daschle still be confirmed to lead the drive for universal health care, we will hear about that and much more from two key senators, Democrat Ben Nelson and Republican Susan Collins.

Once thought as solid as the gigantic machines it makes, Caterpillar laid off 22,000 workers this past week, so we headed to Caterpillar headquarters, Peoria, Illinois, to hear your worries about being tossed from work in this tumbling economy. That's all ahead on STATE OF THE UNION.

The federal government has a big advantage, when it needs more money, say $800 billion, it simply prints it and ships it out. State governments don't have that luxury, when their tax income drops, their budget gets slashed. Michigan's Democratic Governor Jennifer Granholm and Republican Tim Pawlenty of Minnesota have firm opinions about what they need, desperately need, from the stimulus bill making its way through Capitol Hill.

I want to get right to the big question. Citizens of your state and across the country are asking as they watch this debate, governors, in Washington, about spending more than $800 billion. Is it worth it? Is it simply worth it? Will all of this money actually create jobs? And I ask because there are widely varying estimates about what it will do. The Congressional Budget Office says maybe it will create as few as 1.2 million jobs and President Obama as you know says, no, it will create 4.1 million jobs. I want to start with you, Governor Granholm, your state has been hit so hard. How many jobs will this package create in the State of Michigan?

GOV. JENNIFER GRANHOLM, (D) MI: Well, Mark Zandi from Moody's says it would create over 150,000 jobs for us. And believe me, we are all about jobs. Those 140,000 jobs that were lost this past week, we see the impact of this every day and I'm speaking not just for Michigan, but for governors across the country. We need help. We need it now and it's not about budgets, it's about creating jobs in our states.

KING: Governor Pawlenty, how many jobs in the state of Minnesota?

GOV. TIM PAWLENTY, (R) MN: Well, just on the construction aspect of it alone, one of our local congressmen said on highways and roads and bridges, it would be 12,000 jobs, but John, one thing to keep in mind, if you take 813 billion, which is the amount of House authorized, and divide that by 4 million jobs, which President Obama said is going to save or create, that is about $205,000 a job. So people are also concerned about, is this package focused right? Is it targeted right? Is it the best bang for the buck in terms of how the money is being spent?

KING: As you make that point, governor, why not take a principle stand and say I don't want the money, I think it's wasteful spending?

PAWLENTY: Well, in Minnesota's case, we pay more into the federal government way more than we take out so we won't be bashful getting our fair share. But we do lend voice how to how we think this money could be most effectively spent and we hope that those voices will be heard as the debate continues.

KING: You governors have to make the tough choices. You don't get to run up a big deficit like they do here in Washington. And I don't know if you can see me or not, but as we continue the discussion, I want to show front page newspapers out in your states. "The Sunday Free Press" says "Governor to push tuition freeze."

A tough choice for you, Governor Granholm, I'm sure, at a time of economic -- to push in other cuts in the government. In the state we also have - and excuse me, these are a little big, here in the "Duluth News Tribune," "You can survive the awful economy; ten ideas for weathering the storm."

These are the tough choices families are facing. I want to ask you another question being asked around the country. Do you think Washington is making the right tough choices? Because in this $800 billion plan, the Senate plan you have things like this, $400 million to fight HIV and sexually transmitted diseases and $650 million for digital TV converter boxes and $345 million for Agriculture Department computers and $75 million for anti-smoking campaigns and $150 million for honeybee farmers.

They all may be worthy goals, but Governor Granholm, this is a new Democratic administration and new Democratic Congress. Can you say with a straight face that this is emergency spending that necessary, immediately to create jobs?

GRANHOLM: I tell you what is necessary immediately is investment in infrastructure jobs and jobs we can put people to work in right now.

I know that's going to change as it goes through the Senate. I agree that we've got to focus this stimulus package on creating jobs for our people right now, and on making sure that people are not hurt in the meantime. Meaning that you want to make sure that people who go on unemployment have those benefits. You want to make sure that you're not slashing people off of health care, children, pregnant women, senior citizens, people with disabilities. Those are the things that this package is targeted on.

A third toward making sure people are not being hurt. A third toward investing in job creation, and a third towards tax cuts. That to me is a good balance.

KING: I want to be clear, governor. As a Democrat and governor of a leading industrial state, those proposals I mentioned at the top, you don't think they belong in a bill designated as emergency economic rescue, that if the Democrats want to pass those things, why not put them in a separate bill and stand up and say we think these are the things George W. Bush ignored for eight years, we think they are important but we're going to be honest and say this is spending, this is spending that we think is necessary, this other bill is stimulus, we think will create jobs. Why not do it that way?

GRANHOLM: Let me be very clear. I want to see every dollar put into job creation. If things are in there that are not related to job creation it should perhaps be in other bills but this bill should be related to job creation and helping people get through this economic crisis.

KING: Governor Pawlenty, do you have any confidence that Washington will make the tough choices and make the distinctions? Your Democratic colleague says she believes they are necessary but do you think in Washington, a town now with a new Democratic president and Democratic majorities in both the House and Senate, will they make those choices?

PAWLENTY: Let me say first, John, it appears the country is obviously in crisis and we are going to need to do some things to get this economy going. In terms of making tough choices, if you look at the federal government, they are going deeper and deeper into debt. They don't appear at all interested in past or now to be worried about balancing the budget in the context of this crisis. They say we'll pay for it down the road, kicking the can down the road. That hasn't worked. Whether you have a Republican or a Democratic congress. So they just continue to do everything without regard to focus, without regard to prioritization, without regard to balancing the budget. I hope when the Senate gets their bill they will weed out the things that you've just described and focus on those things that will be more directly and more quickly related to creating jobs. That would be the tax cuts, that would be the infrastructure and some other things. In the House bill it appears those got diminished.

KING: You are both chief executives, meaning you both have Cabinets. You need to pick appointees to fill out your administration and carry out the day-to-day business of the state government. President Obama promised to change things in Washington. He promised an open and honest administration. Governor Pawlenty, to you first, we have a treasury secretary that paid $30,000 in back taxes. We now learned over the weekend that the president's choice for health and human services secretary, Tom Daschle, had to pay $100,000 in back taxes in part for not reporting as income a free limousine, a driver and chauffeur that he received. Would you put in powerful positions, critical positions in your state government, Governor Pawlenty, people with those problems?

PAWLENTY: Well, I'm not sure that President Obama knew about those problems before he nominated those individuals. You'd hope he did through the vetting process. And if he didn't perhaps there was a flaw in that process.

Those are concerning developments. They are serious indications that, of course, with the case of Secretary Geithner who has already been approved. I don't know that President Obama, had he known the full extent of those problems or concerns, would have nominated those individuals. I guess the question would be did he know that? Did he know they had the problems before he nominated them? If he did, I would have suggested perhaps they pick somebody else would have been a better course.

KING: Governor Granholm, as Governor Pawlenty noted, Secretary Geithner has been confirmed and Senator Daschle is still awaiting confirmation. Should that disqualify him, in your view? And again, you're the governor of a blue collar state. When people hear, here is a guy who left the Senate. He had a free driver, he had a free sedan driving him around and he didn't think, even though he was on the Finance Committee once and he should knew the tax laws, he didn't think he had to declare that income?

GRANHOLM: It's my understanding that he just learned he had to pay this in August of this year and he had intended to pay it in this income tax filing that he would make. He alerted the president, as did Geithner, and they fixed the problem so they are going to fix the problem. The bottom line is are you picking people who are going to carry out your policy in a way that helps people on the ground in states?

Senator Daschle has a long commitment to universal access to affordable health care. That's part of the Obama administration's plan. He is going to be a phenomenal head of Health and Human Services. And I'm excited that he's there for us. I can tell you, in Michigan, that's one of the reasons why our auto industry has been uncompetitive, is because we don't have a uniquely American solution to the cost of health care that's burdening businesses, not just the auto industry, across this country, as they compete with businesses in countries who provide health care.

So, the fact that Senator Daschle, hopefully Secretary-to-be Daschle has that commitment and has an expertise in it and he has fixed these problems that have come up. Yes, in the vetting and he alerted people in advance, let's get on with it and do what is important to people which is health care.

KING: Democrat Jennifer Granholm of Michigan and Governor Tim Pawlenty, thank you for joining us. We wish you good luck in the tough times in the weeks and months ahead.

Straight ahead, two key senators who say the president's current stimulus plan is wrong and that former Senator Tom Daschle's tax struggles need scrutiny. Republican Susan Collins and Democrat Ben Nelson are next. STATE OF THE UNION will be right back. (COMMERCIAL BREAK)

KING: President Obama's promise of a new bipartisan spirit is in question even before his tenure hits the two week mark. His economic rescue plan didn't get a single Republican vote in the House and without big changes, a partisan divide looms in this week's Senate debate as well. Our guests are determined to change that and say the president would be wise to listen, Democratic Senator Ben Nelson of Nebraska and Republican Senator Susan Collins of Maine. Let me start with a very basic question. To you, first, Senator Nelson, since you are the Democrat.

You have a new Democratic president promising to do things differently in Washington. You don't like this proposal. What is wrong with it?

SEN. BEN NELSON, (D) NE: I like parts of it. That based on infrastructure I think truly will create jobs. That is a robust job creation and protective piece of legislation, but there is an awful lot of spending in it that I think is questionable, marginally supportive and stimulative for jobs. $1.1 billion for comparative research on physician practices, which are better for treatment purposes, 1.1 billion. Seventy five million for cigarette and smoking cessation programs. Now, those are important programs, there's no doubt about it, but they ought to be part of something else, not part of a jobs stimulus bill.

KING: Let me stick with you because you're the Democrat and your party controls Washington right now. Would it not be then if I'm listening to you correctly, would it not be more honest for the president to say this is one bill, this is economic stimulus. It is going to create jobs ASAP and here is another bill, we Democrats won the election and we think George W. Bush neglected a whole bunch of things for eight years and we think they desperately need money. Wouldn't that be a better way to do it? A more honest way to do it with the American people?

NELSON: I wouldn't use the word honest. I think it might be a better way to bifurcate the issues. But at times you put things together on the efficiency of getting something done. There is no pork in this. Let me say that right away. But there may be some sacred cows and I think that's what you've identified. Programs that have been pent up for a long period of time.

KING: I want to get the Republican perspective but Senator Collins, before we do, I want you to listen to Rahm Emanuel. This is the president's chief of staff in remarks he made, I think before he knew he was getting that job just after the election. Let's listen.

(BEGIN VIDEO CLIP)

RAHM EMANUEL, CHIEF OF STAFF: You never want a serious crisis to go to waste. What I mean by that is an opportunity to do things you think you could not do before.

(END VIDEO CLIP) KING: Is that what is happening here, that we have a crisis, nobody disputes that we have a crisis, and that there are chairmen in the House and maybe Democrats in the Wite House are saying there are a lot of things I want to do the past eight years. Top it on.

SEN. SUSAN COLLINS, (R) ME: That is exactly what has happened. Unfortunately, this bill has become a Christmas tree, where members are hanging their favorite program on it. A lot of these programs are worthwhile. But we have to focus on what the impact is on the economy and whether or not the spending creates or saves jobs. That's the question. That's the test that needs to be passed.

KING: So, you've spent the weekend trying to come up with proposed amendments when it comes to the Senate. Give me one or two specifics where you say, Mr. President, and fellow Democrats and Republicans, this is better than the way it is now.

COLLINS: Well, both Ben and I believe that an increase in infrastructure spending makes a great deal of sense. We know that there is a backlog of projects ready to go across this country that will help put people back to work in an industry that is really suffering, and it will leave communities with lasting assets that they really need.

That contrast with some programs that should go through the regular appropriations process. For example, I'm the ranking member in the Homeland Security Committee. I support an increase in funding for cybersecurity, but what does that have to do with getting people back to work and our economy turned around?

KING: To that point, this isn't just a spending debate. It's the first big debate of a new president, who promised Washington would do things differently, that he was tired of the old Washington game, that he was going to come here and it was going to be done differently. Is this the change he promised the way this bill is being handled right now?

NELSON: I think Senator Collins and I are trying to help change things and to do things differently.

KING: I'll take that as not quite?

NELSON: Well, no. He didn't put this bill together.

KING: Was that a mistake?

NELSON: I don't know. It's pretty hard. As a former governor, you have to deal with a legislature, I know that. He has to deal with Congress. So, Congress writes the legislation. I think what he needs to do and what he has been doing is reach out to everybody and get their ideas and then he has to decide whether he can support those ideas. What we would like to do is ferret out those things that are not stimulative in terms of job creation because that is what we need to do to turn this economy around. If has to be robust in terms of job creation. We would like to see a legislation that's in place that will help do that. Infrastructure development, many of those ideas are ready to go. We ought to pursue them vigorously.

KING: I want to move on to some other issues but a simple yes or no? If something similar to the House bill comes to the floor of the Senate, would you vote yes or no?

COLLINS: It would be hard for me to vote for it.

NELSON: Same thing. It would be very difficult to vote for it. I hope that isn't the case.

One of the differences, John, is that we are talking a bipartisan basis here and trying to bring things together from the center. That didn't happen in the House. It rarely happens in the House.

KING: Let me talk about a major controversy on the front pages this morning around America. That is your friend, Tom Daschle. He is to be not only the secretary of health and human services but to have a unique role as a cabinet member with an office in the White House and be the point man on health care reform. If you go home, have a town hall, I bet health care comes up quickly. You go home and have a town hall, I bet the same thing.

This is now the second Cabinet nominee from President Obama who has a major tax issue. More than $100,000 he has paid. And this isn't for something that people can't understand. He had a chauffeur-driven car and he didn't declare that as income. Is that disqualifying?

COLLINS: We don't know enough yet about the details. It certainly concerns me. I know Tom Daschle, I respect him, I worked well with him when he was the majority leader. But this is a legitimate issue, the Finance Committee is going to meet tomorrow. We need some answers. We need more of an explanation than we have now. It's an awful lot of money.

KING: He was the majority leader. He was also on the Finance Committee for some time. Pretty hard to believe he doesn't understand the tax laws and that that is income. If you have a gift like that, a driver and a car, that is income. What message does it send to the average guy out there who may have been audited last year for making an honest mistake on his taxes who had to pay a big penalty -- a lot of people go to jail?

NELSON: It's a tough issue, John. There is no question about it. That's why I think it's important that the Finance Committee have this private meeting with Senator Daschle to talk it over and get a better understanding and I'll be paying attention to what they conclude once this meeting is over.

I think it's important to point out that sometimes the first reports that come out are not always 100 percent accurate. That's why I think it's important that they do exactly what they are doing to get to the bottom of it and I know it's a bipartisan committee, they work together. Senators Bacchus and Grassley have a good working relationship. I'm sure that they'll do the right thing.

KING: Many members of your leadership rushed out statements over the past 24 hours saying they will still definitely vote yes. Are you prepared to say that?

NELSON: I think it's premature to say how you're going to vote on anything. I supported virtually all of President Bush's nominees. So -- but I think what we need to do is just see what the Finance Committee comes out with. I'm not prepared at this point in time to vote no.

KING: You're in the same position?

COLLINS: Yes, I'm in the same position.

KING: I want to thank you both for coming in today. I want you to have an invitation to come back as this debate goes forward. I want to close on a lighter note.

Last night was the Alfalfa Club dinner in Washington, DC. I believe we have pictures of Senator Collins. There she is making her way through the event. This is a closed event and reporters get to shoot you like this but we don't get to go inside. President Obama's first big Washington high-society event as president. Sarah Palin flew in from Alaska, so a little bit of a campaign reunion. Quickly tell us about the dinner.

COLLINS: We can't, you know? It's all off the record.

KING: It would break the rules, right?

COLLINS: But it was an awful lot of fun and it's a great example of Democrats and Republicans, the business community, political community, legal community, even some journalists all coming together for a great evening.

KING: Lobster dinner, right? She's used to that in Maine. How about in Nebraska? You don't have a lot of that in Nebraska, do you?

NELSON: We had beef. I'm sure it was from Nebraska, it was so good.

KING: There is much more to come on our primetime edition of STATE OF THE UNION.

Veteran political observers Donna Brazile and Ed Gillespie looking to change the nature of the republican party and handicap another nominee in tax trouble and then an explanation of our economic troubles with Ali Velshi and the battle lines of the stimulus debate with senators from both sides.

(COMMERCIAL BREAK)

KING: So is the new president already breaking his promise to do things differently? Or is it Republicans in the way of trying to help struggling Americans?

Joining me now is Democratic strategist Donna Brazile and former counselor to President Bush, Ed Gillespie, former Republican chairman as well. Donna, I want to start with you. You just heard the two senators in here, including Ben Nelson. They say this bill is loaded up with stuff that doesn't need to be in an emergency spending bill. Did the president, through letting the House Democrats write the first version, get this wrong?

DONNA BRAZILE, DEMOCRATIC STRATEGIST: Well, John, I think we are focusing on a small number of items that probably got put in the bill because we all know the legislative process. When you open it up for debate, members will add their own pork issues, but one person's pork is another person's red meat and I think this bill has a lot of red meat to help struggling homeowners, to help people who are unemployed, to help children, to help the state governments and I think we should focus on the positive. Clearly there will be an open debate in the Senate and some of these items probably will be removed and perhaps other items will be place in it.

KING: Some of these items might be removed. Ed, I want your thoughts. But Ed, for I want you to listen. He was President-Elect Obama a few weeks ago when he did an interview with ABC and this very subject came up. Let's listen.

(BEGIN VIDEO CLIP)

BARACK OBAMA, U.S. PRESIDENT: We want to spend the money wisely. We want to spend it prudently, but what we don't want is this thing to be a Christmas tree loaded up with a whole bunch of pet projects.

(END VIDEO CLIP)

KING: Does his first big bill, Ed Gillespie, the first big Obama initiative meet the test he laid out there?

ED GILLESPIE, FORMER RNC CHAIRMAN: It doesn't. That is the problem he's seeing on Capitol Hill. And the fact is, give President Obama credit in reaching out to Republicans, but the problem is -- I'll use a football analogy on Super Bowl Sunday, Speaker Pelosi and the Democratic leaders stiff-armed leaders in the process and did not let them into the process. I think that's why you see a lot of these pet projects in there. This is not very stimulative, John. The fact is when you're spending $650 million on direct TV or digital TV transmission and $400 million for global warming research, a billion dollars for Amtrak, $400 million for new renovations in federal buildings, that doesn't help folks out there in the real world and that is what this bill needs to do.

KING: I want to shift gears to a story that's making headlines around the country this morning and that is Tom Daschle. He was the Senate majority leader, prominent Democrat. He's about to get an incredibly important job in the new administration.

Not only as the head of a Cabinet agency, runs Medicare, runs Medicaid, but he also gets an office in the White House, to be a point man on the effort to reform the health care system.

Turns out he had a car, a chauffeur and driver, a chauffeured car when he left the Senate answered didn't declare that as income on his taxes. Back in June of this past year, apparently people close to him say he realized this and he amended his taxes and fixed it. Is it a coincidence, Ed Gillespie, that in 2008 when Senator Daschle, his aides say he came to realize this when Barack Obama clinched the Democratic nomination and maybe Senator Daschle starting thinking about joining a new administration?

GILLESPIE: I don't know if this is a coincidence or not. This really looks bad and it's a problem because it comes on top of Tim Geithner's problems on avoiding taxes and it follows Chairman Charles Rangel's problems on paying tax on luxury property in the Caribbean. The fact is a lot of people can legitimately wonder from a Democrats' perspective are these higher taxes imposing for others to pay but not for us.

And I think in the case of Tom Daschle having to pay $140,000 in back taxes over limousine service, if this were a Republican, this would be a very difficult story. It's going to be a very difficult story for Democrats as well because it just doesn't look good.

KING: How do you deal with that? Let's assume, for the sake of the conversation, Senator Daschle made a mistake. People make mistakes. I don't want to over -- pile on him. By cumulatively, Ed made the point. Your party ran against the culture of corruption. In part was successful in taking back the Congress by running after Tom DeLay saying the Republicans fostered a culture of corruption.

Are you not inviting Republican attacks two years down the road if you have a pattern of these things?

BRAZILE: Well, first of all, Tom Daschle is a man of integrity, and I'm sure that his accountant and, of course, Mr. Daschle himself will explain this tomorrow before the committee. It is an error that should have been corrected, and I'm not an accountant, so I don't know why it was overlooked in the first place. But Tom Daschle, I'm sure, is prepared to answer questions. This is a man who has been in public service for over 30 years of his life. He is a man of character. He understands the health care crisis and I hope he can at least answer these questions and hopefully be at President Obama's side to help reform our health care industry.

KING: I want to talk now about a change in your party, Ed Gillespie. You once served as the chairman of the party. Your party decided, after several ballots, it was an interesting election to elect Michael Steele, the African American and former lieutenant governor of Maryland to be the Republican national committee chairman.

It's a tough job. I'm not sure anybody would want at the moment. But sometimes out of the ditch comes a great opportunity. What do you know about this man and what will he do differently to the Republican Party?

GILLESPIE: Well, Michael Steele is a good friend of mine. I'm happy that he is going to be the chairman of the Republican National Committee. I think he gives us a burst of energy. This is someone that was able to get elected statewide in Maryland. No easy feat as a Republican. He ran a very effective race for the United States Senate in a very tough year in 2006, was an effective state party chairman. That's when I first got to know him, someone that when I was chairman was incredibly helpful to me as we reached out to African American voters and Hispanic voters in a way the party hadn't done for a while.

I know he will pick up that mantle and do more of that as well. Let me just say too, by the way, I think much has been made now the Republican Party has an African American at its head and the Democratic Party, an African American in the White House. I think both instances, obviously, that is an important factor. But Michael Steele, had Hillary Clinton been elected president or John Edwards been elected president, Michael Steele, a pretty good chance he would be the RNC chairman today because of his effectiveness in making the case for Republican Party policies.

KING: Does he worry you what you know of him, how he looks at organizing fund-raising, as a Democrat? Do you look over and say, well, I wish they hadn't picked that guy?

BRAZILE: Well, clearly, he is dynamic. He is charismatic. I know him very well. He's a Georgetown Law graduate, he is a native Washingtonian who went to PG County and Ed is absolutely right. He was able to win in a fairly moderate to liberal state but, look. Michael Steele will face many challenges as the chair of the Republican Party to get the party out of the wilderness, to reinvigorate it with new ideas and to begin to move the party from being a regional party to a national party again. So, he has a big job ahead of him.

KING: When STATE OF THE UNION returns, we will have an update the latest news and Ali Velshi will join me at the magic wall with a look at the latest depressing economic news.

(COMMERCIAL BREAK)

DON LEMON, CNN ANCHOR: Hello, everyone, Don Lemon at the CNN world headquarters in Atlanta. Back to STATE OF THE UNION with John King in just a moment. But first I want to give you some headlines.

The ice is melting but the damage done. Kentucky's governor says last week's ice storm was the state's biggest natural disaster in modern history. Ninety two of the state's 120 counties declared state of emergencies.

Some 400,000 customers are still without power. National Guard troops are now going door-to-door to check up on people.

Olympic swimmer Michael Phelps in damage control mode tonight. He is confirmed that this photo from a British tabloid is the real thing. It shows him smoking marijuana at a South Carolina house party last fall from a bong.

I will have much more on this tonight at 10 p.m. Eastern. What do you think? Should he pay the price? Is it going to be an image problem for him? Log on to twitter, Facebook, MySpace, iReport.com to tell you what you are thinking. We will get them on the air at 10 p.m. I'm Don Lemon at the CNN world headquarters. See you at 10:00 Eastern here on CNN. Now back to STATE OF THE UNION with John King.

KING: Welcome back to STATE OF THE UNION. Coming up, we'll go outside the Beltway and see how the economic situation is effecting people in their homes and offices. But first CNN's chief business correspondent Ali Velshi shows us the big picture in a steadily worsening recession.

ALI VELSHI, CNN CORRESPONDENT: We have not seen these sort of layoffs in a long time. This recession is in its 14th month. Let's go back to when it started, December of '07. That's the unemployment picture for the country. Now the dark colors are the states that are relatively healthy. You can see back there, 2.7 percent unemployment was the best situation. The highest, and you want to keep an eye on this number was 7.4 percent. That was obviously Michigan. We've been seeing auto layoffs a long time. Keep an eye on this. We had some problems in South Carolina, Mississippi and you can see here, in Alaska.

Move six months forward to June of 2008. The picture was changing. First, of all, the highest unemployment rate in the country gone from 7.4 percent to 8.5 percent. Still Michigan, I think we can count on the fact Michigan's in the worst situation, but take a look around the middle of the country. You were seeing job layoffs in the Southeast and the Midwest. You still had relative health here in the mountain west. But California was becoming a bit of a problem. Now let's move this back forward to December of 2008. This is the latest month for which we've got numbers. Take a look, 10.6 percent is now the high end. Once again, it's Michigan, Rhode Island has joined Michigan as one of two states with unemployment above 10 percent. We've got problems here in the Midwest. And the problems in the California have spread to Oregon and Nevada. Now, you still have this strength here in the Mountain West. But the unemployment rate for the nation is 7.2 percent and you're going to get new unemployment numbers on Friday. And guess where we're expecting those to go? Only expected to go up and more job losses.

KING: Many think it's going to 9 percent at least before it gets better.

VELSHI: And the calculations I've run based on what different economists are saying get us close to 9 percent, maybe not that far, but there are whole lot of people who are part-time workers that don't get benefits, there are a whole lot of people unemployed for so long, they've fallen off the roll. So the real number of people unemployed is greater than 7.2 percent. One piece of information we should think about. In this economy, every month a number of people come into the country, they graduate from school, just in order to keep up with the working age population, economists say you need to create 100,000 to 150,000 jobs a month. We lost in December more than 50,000 jobs. We may see that again in January.

All of 2008 cost us 2.6 million jobs. So, 2.6 million on the downside versus 1.2 to 1.8 on the upside, that's the problem.

KING: Ali Velshi gave us the cold, hard facts. So just what will Congress and the president do to help? Senator Dianne Feinstein and John Ensign discuss how the Democrat-Republican divide will affect next week's big negotiations over economic stimulus.

(COMMERCIAL BREAK)

KING: Welcome back to the prime time edition of STATE OF THE UNION. I'm John King.

House Republicans made it very clear they simply don't believe the president's economic stimulus plan would work and not one voted for it. Now, attention is turning to the Senate. Will it be a bipartisan effort this time, and more importantly, will it work?

Only two of the question I posed to California Democrat Dianne Feinstein and Nevada Republican John Ensign.

Senator Ensign, let me start with you. Over in the House, the leader, John Boehner, told his members last week, vote no. That is the best vote for Republicans. Will you tell your colleagues in the Senate as they look ahead to the midterm elections, vote no?

SEN. JOHN ENSIGN, (R) NV: Actually, what I think we should tell the Republicans, same thing the Democrats should say is, let's make sure we have a stimulus package that works, that creates jobs.

Right now we all know that the housing industry is what drug down the economy. And this stimulus bill is not fixing the housing industry. And so we need to work together with the Democrats. We have a plan that we're introducing that will actually fix the housing industry to a great degree. It will allow everybody to refinance their home mortgages at 4 percent, right around 4 percent.

What that does is not only help the housing industry, but it also puts about a little over $400 in every American's pocket that owns a home, an average of $400 per month. That is a huge boost to the economy. That would be very stimulative.

If you combine that with properly targeted tax cuts, we can really get this economy going instead of doing a massive spending bill that just fulfills the last 10 years of Democrat priorities. They're using this stimulus bill as an excuse to fulfill their wish list that they've had for a long time.

KING: Your Republican colleague says an excuse to fulfill your wish list that you've had for a long time. Your colleague from California, the House Speaker Nancy Pelosi said we won the election when Republicans protested.

But we had two Democrats on this program earlier, the governor of Michigan, Jennifer Granholm and your Senate colleague Ben Nelson of Nebraska. They didn't agree with everything Senator Ensign just said, but they did say there is a lot in this bill that should be put in a spending bill and that Democrats should have the courage to stand up and say we think these are important priorities. But that those things don't belong in an economic emergency relief package. Do you agree with that? SEN. DIANNE FEINSTEIN, (D) CA: Well, I think the package will be changed. It will be changed in conference.

KING: I want you both, before I get your thoughts, to listen to one of your Senate colleagues, Claire McCaskill, Democrat of Missouri, on the Senate floor this past Friday.

(BEGIN VIDEO CLIP)

SEN. CLAIRE MCCASKILL, (D) MO.: We have a bunch of idiots on Wall Street that are kicking sand in the face of the American taxpayer. They don't get it. These people are idiots. You can't use taxpayer money to pay out $18 billion in bonuses.

(END VIDEO CLIP)

KING: Strong language, there, "These people are idiots."

Senator Ensign, to you first. I assume you don't want taxpayer money going to these big bonuses. Is part of the problem that in the initial installment of what we call, in Washington, TARP, that bailout money, there weren't strict rules on how that money should be spent?

ENSIGN: Well, and it goes to the problem, in Washington, when we rush through legislation, we usually don't do things right.

And that's exactly what happened with the TARP funds. We rushed that legislation through. It was a, quote, "panic" at the time. We overreacted. And that happens so many times in Washington, D.C. We're seeing the same thing with the stimulus bill, that people are creating artificial deadlines. Yes, we need to act swiftly. But you need to make sure you do it right.

The TARP funds were not done right, and we're seeing a lot of side effects that are outraging the public. And when we rush things through Washington, we get a lot of things wrong.

KING: So, Senator Feinstein, what now?

There's outrage. Your friend, Senator McCaskill -- that's great language, "They're idiots." Should something be done to stop it, or is your time better spent on bigger issues?

FEINSTEIN: Oh, something should be done to stop it, no question about that. This is a lot of money; $350 billion has gone out; another $350 billion is requested. And people say you need more beyond that.

And this is not a popular program with the American people. Ergo ...

KING: That's an understatement.

FEINSTEIN: ... it would seem to me that Wall Street should be sensitive to this. I believe salaries should be limited. I believe bonuses should be done away with, for the time being. And I believe that there should be transparency. I've introduced a bill. It's a bipartisan bill to provide for this. And the $350 billion was supposed to be put up on the Internet, as to its uses. And it has not been.

So I think there has been a level of noncooperation in Wall Street. I think a lot of it strikes at the culture, which is, kind of, inbred and "This is the way we do things," and "World, you just have to leave us alone. It's the American way."

Once you take federal money, the culture changes and the world changes.

KING: Let's talk about something else that many Americans might, over the next week or so, say, "I guess that's just the way they do things in Washington."

This is a front page newspaper from Vermont, "The Valley News". Down here, you see "Daschle, enriched by health sector, bungled taxes."

Tom Daschle is your former Senate majority leader in the United States Senate. He is Barack Obama's choice to be the secretary of Health and Human Services. And it turns out, we learned, starting Friday, he had to pay more than $100,000 in back taxes for, among other things, having a car and a driver and not reporting that as income.

This comes on the heels of a Treasury secretary, who runs the IRS, who also had a tax problem.

Senator Feinstein, you are a chairwoman of a committee in the United States Senate. You have to vote on this. I know Tom Daschle is a friend. Does this disqualify him?

FEINSTEIN: I don't think it disqualifies him. And I'll tell you why. I've been there 16 years. I have watched Tom Daschle. I have worked with him. I have seen his leadership potential. I know personally how much he cares about health care reform.

What's important to me, in this nominee, is that he knows how to do it. He's had the experience with the Hill to know the difficulties of moving a program. He watched the Clinton program go through the Hill. He saw the problems. And I think, hopefully, he can avoid them.

So I believe that this is a mistake. And I suspect, John, you're not perfect; I'm not perfect. Mistakes are made. The taxes are going to be paid. It should not destroy the worth of this man for the American people.

KING: I'm not perfect, Senator. And, Senator Ensign, I assume you would not say you are, either.

But politics can be a funny business. And when you have a Treasury secretary who had a tax problem, now it looks like a Health and Human Services secretary who had a tax problem -- I've been at this a little while, and I can see Republican ads, conservative ads going after this president saying things like, "He promised to change Washington. I guess that's a change." You know, "He promised an honest and ethical administration. Oh, really?"

Is this going to be t-ball for Republicans in the political sphere?

ENSIGN: Well, I don't know about t-ball for Republicans. But, certainly, the media should be looking into this very closely.

We have to look at the details of exactly what Tom Daschle knew, what he didn't know. And I think all of this will come out during the hearings.

But a bigger problem is that our new president has talked about not only cleaning up his administration but also getting rid of the whole revolving door.

Well, Tom Daschle was part of that revolving door. You know, he says he doesn't want to employ any lobbyists. But Tom Daschle worked for a lobbying firm, made millions of dollars, gave speeches to the very industries that he's now going to be working with.

What kind of favors did they curry? All these kind of questions need to be answered. And, certainly -- and not only that; Tom Daschle's wife is a lobbyist. I mean, it just -- it is part of that inbreeding culture that we have in Washington, D.C., that I think that needs to be stopped.

And if we want the American people to trust us in Washington, D.C., we have to do things in a different way.

I think that the president is sincere in his desire to do things in a different way. And, unfortunately, some of his nominees, whether it was the commerce secretary, Bill Richardson and his problem; the number two person in the Department of Defense, or these two nominees for the department.

KING: I ...

ENSIGN: There's some problems here.

KING: I get your point. Quickly, Senator?

FEINSTEIN: I want to say something. You know, I think it's really disingenuous. Republicans brought us the revolving door, the whole K Street plan. The Republicans went out to develop an historic relationship with the lobbying community. And now they turn around and they're the great critics.

KING: I don't mean to be rude. But I want to get you -- before we run out of time, I want to get your thoughts on this front page "L.A. Times" story. This is your committee, the Intelligence Committee.

"CIA Retains Power to Abduct."

We know that Barack Obama has said no more torture, that he will close Guantanamo Bay, prison detainees. But this articles, in the "L.A. Times", says he has signed executive orders to continue the controversial CIA practice of rendition, essentially scooping up suspected terrorists around the world, sometimes taking them to secret prisons.

What can you tell us about this?

FEINSTEIN: I don't believe that's true. What he said is that there can be temporary housing. There has to be temporary housing. You pick somebody up; you have to know what they have done. You have to have some time ...

KING: The renditions -- the renditions. Does the CIA, under an Obama administration, retained the right for rendition, to scoop up suspected terrorists around the world.

FEINSTEIN: Not -- not in that sense that you mean rendition, which is sending them, also, to another country or to a black site.

What they're talking about is temporary holding. The fine points of it have to be fleshed out and will be fleshed out. I've met with Greg Craig about the executive order on two occasions, now.

The Intelligence Committee will be providing oversight over it. And as you know, I have a bill to close Guantanamo, to end contractors doing interrogations, to have one standard across, which is the Army Field Manual.

The executive order coalesces with this bill. And we need time to really address the fine points of the executive order and see if it's sufficient or if we need to codify some of this.

KING: We'll keep our eye on it, as that often secretive process continues.

Senator Dianne Feinstein of California, thank you much.

Senator John Ensign of Nevada. Thanks to you as well.

When we come back, your voices and your struggles. Up next, we look at the state of the economy up close through the eyes of workers losing their jobs at a big manufacturer that had, until now, escaped the pain. STATE OF THE UNION from the floor of Caterpillar and the living rooms of devastated families just ahead.

(COMMERCIAL BREAK)

KING (voice over): The statistics are bad enough. The Labor Department now says a record number of Americans receive unemployment benefits, just under 4.8 million.

That number's on the rise because the reach of the recession is spreading. Behind the number, painful stories.

And keeping our promise to include your voices in our "State of the Union" report took us, this week, to the factory floor In Peoria, Illinois.

(BEGIN VIDEOTAPE) KING (voice-over): Daybreak along the Illinois River, Peoria, one of the factory towns born of America's industrial heyday, now slapped suddenly by a recession it had bragged of escaping.

Caterpillar, bedrock of the local economy, stunned workers last week by slashing 20,000 jobs worldwide, many here in the Peoria area. Then on Friday, more shock, 2,100 more jobs cut, just here in central Illinois.

MARIBETH FEAGIN, FORMER CATERPILLAR EMPLOYEE: I don't want to be on unemployment. I've never been on unemployment before.

KING: For John and Maribeth Feagin, a double whammy: both worked at Caterpillar; both out of work, effective Friday; three children, two cars and a mortgage.

M. FEAGIN: You've got to budget. You've got to cut back where you need to; going to second hand store to, you know, make sure the kids are clothed.

What book do you want to read?

KING: John is going back to school, using benefits from a tour in Iraq with the Illinois National Guard. But if Maribeth can't find work within a few months, the options turn drastic.

JOHN FEAGIN, FORMER CATERPILLAR EMPLOYEE: If things really got that bad, I would probably volunteer to go back overseas. And that's pretty bad to say.

KING: You'd volunteer to go back to Iraq or Afghanistan?

J. FEAGIN: For my family, I would, yes.

KING: Confronting such stark choices is harder because these jobs were the gold standards. As automakers and other U.S. manufacturers suffered in recent years, Caterpillar thrived because of overseas exports.

UNIDENTIFIED MALE: The world knows we're the best. These people in here are all busting their butt.

KING: In a union shop, Jim Lierle's (ph) 39-year seniority protects his job. But he worries a way of life is fading.

UNIDENTIFIED MALE: I made a good living here. The kids coming in now, I'm not for sure they're going to make the same good living I made. It's bad. It -- I really -- my heart goes out to the people, I tell you.

KING: It was that dream of a good middle-class living that convinced Chris Guynn to move his family here from Las Vegas.

CHRIS GUYNN, FORMER CATERPILLAR EMPLOYEE: I wanted to work with a company that's been around for 83 years and, you know, a Fortune 500 company. I mean, how you could lose on something like that? It was just a company that you could just retire with, great pension, great requirement, 401(k), and so forth.

KING: Guynn was among more than 800 workers abruptly told Friday was their last day.

GUYNN: It's hard, you know, because now I have to look at my wife to be the breadwinner, and looking at my kids.

KING: Because his wife works, Guynn is enrolling full-time at Central Illinois College.

Back to school isn't an option for Christi Williams.

UNIDENTIFIED FEMALE: Well, it's just me and my kids.

KING: There is no other breadwinner. A single mother, five young children, Williams left a job at a law firm for long-term stability and better benefits at Caterpillar. Her two-week notice came last month.

CHRISTI WILLIAMS, FORMER CATERPILLAR EMPLOYEE: At first, I wasn't worried. I just -- I've never been laid off in my life.

KING: She is worried now.

WILLIAMS: I think there's just so many people out there looking for the same position. There's a lot of very highly qualified people out there, and people with degrees, such as myself. And it's just been very hard.

KING: Williams says she'd love help from Washington but isn't counting on it. Her unemployment benefits run 10 more weeks. Juggling the bills is hard, hiding the toll at home hardest.

I don't let them see that I'm stressed out about things. I'm very nervous. And I'm very nervous, and every day on the news, there's more layoffs that are being shown.

(END VIDEOTAPE)

KING (on camera): That's it for this week's STATE OF THE UNION. We'll be here again next Sunday and every Sunday at 9 a.m. Eastern for the first and last word in Sunday talk. Until then, I'm John King in Washington. Have a great week ahead. LARRY KING WEEKEND begins right now.

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