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FAREED ZAKARIA GPS

Interview with Tony Blair; Debate on Economics

Aired June 28, 2009 - 13:00   ET

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


FAREED ZAKARIA, HOST: This is GPS, the GLOBAL PUBLIC SQUARE. Welcome to all of you in the United States and around the world. I'm Fareed Zakaria.

Iran continues to dominate the news, and it will dominate our program with an interview about the situation with the former prime minister of Great Britain, Tony Blair.

But we also have a feisty debate between two of the world's leading economists -- Paul Krugman and John Taylor -- who disagree about just about everything.

But first, my thoughts about Iran.

When we see what's been happening in Iran over the last two weeks, inevitably our thoughts go to 1989, when similar demonstrations brought down a series of repressive regimes in Eastern Europe. Those so-called "velvet revolutions" toppled the entire structure of communist power and ideology within a few months.

It makes us imagine that something similar is possible in Iran. It's possible, but unlikely.

On this program last week, Zbigniew Brzezinski warned against drawing easy parallels with Eastern Europe. And thinking more about it, I realized that there were three powerful forces working against the communist regimes in the Soviet empire: democracy, nationalism, religion.

See, the protesters hated communism, because, one, it denied people any participation in government; two, it was imposed on Eastern European countries by Russia, an imperial power; and, three, the atheist ideology of communism was a violation of the core beliefs of the very devout and religious people of Eastern Europe.

If you think about it, democracy, nationalism and religion are the three most powerful forces in the modern world -- all arrayed against the communist regimes. It's no wonder they cracked.

But in the case of Iran, these three forces are not all arrayed against the regime. Democracy is certainly working against it. But is religion? It's unclear. Iranians don't seem to like theocracy, but they are religious. And clearly, Ahmadinejad got the votes of many rural, observant people.

As for nationalism, neither side can truly claim it. But the regime is trying hard to do so, accusing Britain and the United States of interfering in Iran's internal affairs. And it's a charge that does resonate in Iran, which is a proud and prickly country, which is why President Obama is quite right to tread cautiously in his statements on Iran, offering strong moral support, but steering clear of political interference.

Nobody in their right mind can doubt where America stands in this struggle. We have not had relations with this regime in Iran for 30 years. But inserting America into the fight will help the regime, not the people.

Obama's critics are senators and columnists. They can grandstand, he has to govern. They want to make a point, he wants to make a difference.

So, let's get started.

(BREAK)

ZAKARIA: Tony Blair was prime minister of Great Britain for 10 years. And throughout that time, he often took a very hard line on Iran. Yet he also maintained diplomatic relations with that country. Britain has an embassy there. He met face to face with many of the leaders who are at the center of the current struggle.

Welcome, Tony. You were our first guest on the program. It's been about a year, and we hope this will become an annual event.

TONY BLAIR, FORMER PRIME MINISTER OF GREAT BRITAIN: I certainly hope so. Thank you.

ZAKARIA: Let me ask you about Iran first. The biggest question people have in the United States, certainly, is, has Obama struck the right balance, offering support -- moral support -- but not inserting himself really politically into the process? Is that the right balance?

BLAIR: I think so. I mean, I think, look, it's a really difficult judgment, because everybody will know where he stands, what he thinks.

I think there's a great sense, actually, worldwide of solidarity with people in Iran right at this moment. But it's important that you don't do things that are also counterproductive or make life more difficult for the people who are struggling there for the right to be free.

So, you know, in a sense it's not surprising that it's a difficult balance to strike. But, yes, I think he's struck the right balance.

ZAKARIA: Your government, along with France and Germany, negotiated with the Iranians for several years. What can you tell us about -- what was that like? How difficult were the Iranians? Did you feel there were elements of moderation, there was a deal somewhere down the road there to be had? BLAIR: You know, that's a really good question. And if I'm frank about it after all of those years of interaction with them, I'm not sure what the answer is. And that's the difficulty.

And, you know, I think that for the Iranians, for other people in the region, they've got to understand that this is a new American administration that has come in. President Obama has in a sense said, "Look, this is a new start in my relationship with the Islamic world, with the Arab and the Muslim world and with Iran. I want a partnership, I want a partnership of equals, but here are the conditions for it."

And they'll not get a better offer than that. You know, they won't get a better response.

What I don't think has changed is the essential view that nuclear weapons capability for Iran is a threat to the stability not just of the region, but of the wider world. That's not changed.

So what this is about, I think, is saying, look, if your issue with us, with America or with the West, is for whatever reason the sense of disrespect or not according you the position that you should rightfully have as a major country in that region, we're prepared to have that relationship of respect.

But it depends how you behave, obviously, just as it depends how we do. But nuclear weapons capability and exporting chaos and terrorism around the region are not acceptable ways of behaving.

ZAKARIA: The supreme leader singled out Britain for special condemnation, interfering with Iranian affairs. Why do you think that is?

Is the British embassy in Iran -- I mean, you were in effect running it for 10 years, running the whole British government -- do you fund espionage activities? Do you do things that -- why are the Iranians so focused on you guys?

BLAIR: This is nonsense. I mean, they know it's nonsense. I guess they've got to choose somebody to go after, so they choose us.

And, you know, I have been very clear, obviously, in the statements that I've made, both as prime minister and afterwards, that nuclear weapons capability of Iran is the red line, and that Iran should stop exporting terrorism, destabilizing people within the region. I mean, I think that's pretty obvious to say.

And let me make one thing very clear. For us in Britain, we greatly value Iran as a country, its people as a people, its civilization, which is an ancient and proud civilization, as indeed just that.

But the fact is that there are elements within the Iranian system that do cause genuine instability, and worse, around the Middle East. And what we hope very much, whatever happens over these next weeks in Iran, is that over the time to come that we can have a relationship with Iran in which they are trying to be helpful and constructive and conciliatory.

And I think what President Obama is doing is right, which is to say, OK, if the issue is that you felt you were not treated with proper respect, people were not prepared to reach out to you, I'm reaching out to you. But obviously, it's important they reach back.

ZAKARIA: So, what happens if Ahmadinejad wins, or if this election is kind of consolidated in various ways -- which, you know, it appears is more likely than not. Should the United States continue that policy of offering negotiations, or are all bets off now because of the instability?

BLAIR: Well, I think, in terms of nuclear weapons capability, we have no option but to carry on trying to ensure that that does not happen. And obviously, what people want to do is to make sure that we can succeed diplomatically in ensuring that it doesn't happen.

Because the important thing to understand about this is that the concern is not just an Israel-Iran concern, which is the way it's often put, right across the Arab world there would be immense anxiety if people thought that Iran was getting nuclear weapons capability. And the danger, of course, is that you then spark a nuclear arms race right across the region.

ZAKARIA: But you know that there are people in the conservative camp in the United States who now say, look, you can't negotiate with Ahmadinejad now, that we now see this regime for what it is, and to just try to go back to business as usual, as though these events were just an inconvenient detour, is a mistake.

BLAIR: No, look. I totally understand that. But in the sense, it's not business as usual, because we don't know how this is going to play out. Let's wait and see.

But I don't suppose it will -- if it plays out in the way that you anticipate -- and I just can't be sure, I really don't know at the moment. But if it does, and this expression of popular will is suppressed -- I'm not saying that people don't take account of that. All I'm saying is, in respect to the objective of ensuring that Iran doesn't attain nuclear weapons capability, you've got no option but to try again to make every effort that you can, diplomatically and otherwise to ensure it doesn't happen.

But I mean, Iran, obviously, should understand that what happens in Iran at the moment is bound to affect people's perception of the regime and its intentions.

ZAKARIA: You talk about how events in Iran may be part of a broader trend. You've traveled the region a lot. Do you believe that Obama's speech in Cairo to the Muslim world had an important impact?

BLAIR: Huge. There's no doubt about that.

Now, none of that means there aren't really difficult decisions further down the line. But it has created the space, if you like, for people within that region who want that modern, coexistent future to step out and step forward and say, look, come on, we can -- you know, if there are problems in this region, maybe we've got to look at the way we have governed ourselves rather than thinking it's a problem from the outside.

Actually, we do have a new administration in America. Actually, they are serious about moving forward on the Palestinian issue. So, there is a sense in the region, without any doubt at all, that there's a new start, new possibilities.

Here's the thing, however. That process of change, which is an evolution over time, it has to be encouraged and has to be developed. And there are tough choices that may come along with it. Because if, for example, Iran says, well, OK, you know, you've reached out to us but we're not changing, then you've got difficult decisions to make.

ZAKARIA: Tony Blair, thank you. A pleasure, as always.

BLAIR: Thank you.

ZAKARIA: And we will be back.

(BEGIN VIDEO CLIP)

ROBERT BAER: Iran's economy is in shambles -- inflation, unemployment, discontent, fury in the streets in all classes. And eventually it will crumble, just as Eastern Europe crumbled in 1989. The question is: When?

(END VIDEO CLIP)

(COMMERCIAL BREAK)

ZAKARIA: Robert Baer was a CIA agent for 20 years and was once called perhaps the best on-the-ground field agent in the Middle East. So he knows how American intelligence operates in that part of the world. He knows where the bodies are buried, so to speak. Robert Baer joins me now from Berkeley, California.

Welcome.

ROBERT BAER, FORMER CIA AGENT, AUTHOR, "THE DEVIL WE KNOW: DEALING WITH THE NEW IRANIAN SUPERPOWER": Hey. How's it going?

ZAKARIA: When you watch what's going on inside Iran, do you think it's pretty clear that the government has the ability to really consolidate power and crack down on this?

BAER: Fareed, I'm quite sure there's been a military coup d'etat by the Islamic Revolutionary Guard Corps in Tehran. They've taken over. And the fact that the Basij came out so quickly, they could have only done that on orders from the IRGC.

The fact that Ahmadinejad is a former IRGC officer, he has the backing of senior officers, I think what we've seen is a military coup against the old clerical establishment.

What do you do about a military takeover in a country like Iran? You just simply wait it out.

ZAKARIA: So, what you're suggesting is that the guys who were running it, who were the front -- or perhaps were originally the ultimate authority, the clerics, the Council of Guardians -- this has all given way to the brute force which was military power, which is these Revolutionary Guards.

And what do we know about these guys?

BAER: They're hardliners in the sense they're extremely nationalistic. They've had a terrorist past. They were in charge of the hostages, for instance, in Lebanon, attacking American targets, the Islamic resistance there -- terrorist attacks across the world.

In 1996, the Islamic Revolutionary Guard Corps conducted its last terrorist operation in Saudi Arabia. And for the last 13 years they've been fairly quiescent. But they are the praetorian guard of the regime. And they do control the military as well as Tehran's streets. And they are the ultimate authority in Iran right now.

ZAKARIA: When you look at the situation, does it strike you that the regime is, you know, fragile, that this is not something that can last for decades?

BAER: Oh, I think it's fragile, absolutely. The question is the timing, when will it collapse? The fact that the former president, Rafsanjani, Ayatollah Montazeri, and on and on have all opposed Ahmadinejad and Khamenei on this is historic in -- during the revolutionary times, I mean, just since 1979.

It's just incredible what's happened in that country. But I think what we see is the Islamic Revolutionary Guard Corps and Basij face down the clerics, and so far, as of today, have won.

Now, this can't go on forever. Iran's economy is in shambles -- inflation, unemployment, discontent, fury in the streets, in all classes. And eventually it will crumble just as Eastern Europe crumbled in 1989. And the question is: When?

ZAKARIA: Ahmadinejad has asked President Obama to apologize for American interference in the Iranian elections. And in general, they have claimed that the United States interferes, tries to destabilize the regime.

And my question to you, Bob, is, isn't that true to a certain extent? I mean, don't we fund various groups inside and outside Iran, particularly outside Iran, that do try to destabilize the government?

BAER: Oh, absolutely. I mean, there was an op-ed piece in the "New York Times" not too long ago talking about the fact that there is a covert action program against Ira, where the military is running covert action against Iran from Iraq and Afghanistan. It's very low- level stuff. It's not going to change the politics, but it certainly fuels the paranoia in Tehran.

ZAKARIA: Do you think it means we shouldn't do it? I mean, do we get much for it?

BAER: Oh, we get nothing out of it. It's simply to appease the hawks in Congress.

These programs will get us nowhere. There are no assets inside Tehran. There's no press assets. There's no politicians in touch with the CIA. There's nobody in the military in touch with the CIA.

It will get us nothing. It's just purely to appease Congress.

ZAKARIA: When you look at a regime like this that is cracking ideologically, where there is elite disagreement, we've seen this before in various ways, in the communist world, in other places.

Is there anything we can do from the outside? Should we do anything from the outside?

BAER: There is nothing we could do, and there's nothing we should do.

The Iranians remain, if I can use the word, a paranoid people. They believe that outside influence is constantly trying to destabilize the government and can destabilize it. They remember the Mosaddeq coup.

Any statements that suggest that we want to influence politics there or the outcomes of these elections, or change people in government, will only have consequences worse for the democratic movement there.

ZAKARIA: One of the things I wonder about with respect to Iran, we don't know a lot about it, because we haven't had relations with Iran for 30 years. We don't have an embassy there.

How much of a disadvantage is that? Because, you know, we are dealing with this issue with Syria as well. My gut is that we should have more rather than less contact, if only to learn more about these regimes. We operate sort of in the dark without it.

BAER: Fareed, that's exactly right. We know -- the government knows virtually nothing about Iran, because we don't have an embassy. The CIA doesn't have a station there. In fact, at the CIA, I don't know of a single officer who is even into Iran.

There may be one or two at State Department still serving. They've all retired, moved on. The Farsi is all university-learned.

We are ignorant when it comes to Iran. I am ignorant when it comes to Iran. I mean, by dint of experience, I've learned a little bit. But we are truly, truly blind when it comes to that country.

We do not understand the fissures inside the clerical regime or inside the IRGC. We do not have a clue whether the IRGC is unified or not, or the military, or even if the military has any inclination to come to the side of the democrats. We just don't know. Every day is a surprise for us. ZAKARIA: Now, why is that, Bob? Because there are clearly people who don't like the regime. There are clearly people who in some way are liberally minded. You know, we're seeing them on the streets. We are watching them disagree with each other.

With all of these potential dissidents, how come we can't make contact with them?

BAER: Well, we can make contact with the dissidents. They fly to Europe. They fly to Los Angeles, New York.

But the problem is, in a sense, they're exiles. And the CIA and the State Department have never been able to trust exiles like this that want to go home, that want to change the government, that want to convince us that the government is changeable. So we look at everything they say with a certain amount of skepticism.

And again, what can we do for them? They obviously don't need money. Arms aren't going to work. So there is nothing we can do. We just have to let this play itself out and hope for the...

ZAKARIA: But what about the people inside Iran? Why is it that we can't make much contact? Is the fear of collaborating with America is that it would taint these people too much?

BAER: They're terrified of being tainted by American support. They're terrified of meeting Americans. And the hardliners, the Islamic Revolutionary Guard Corps, don't meet Americans.

I mean, I was in Tehran, the last time in 2004, and I knocked on our embassy trying to get in. And the IRGC officer came out and said, go away. I knocked again and said, I'm an American -- I was joking -- I was American taxpayer. And he says, go away.

And these people just don't want to talk to us. We don't know what they're thinking. It's almost a cult-like government there, akin to North Korea.

ZAKARIA: Bottom line, how do you think things are going to unfold over the next few weeks? Not a long-term prognosis, just over the next few weeks?

BAER: I think people are going to be starting coming off the streets. We're going to see fewer demonstrations. We're going to see more of a crackdown. We're going to see the frustration start to build again.

And the question, again, how long can they hold on to this volcano, keep it from erupting? I really don't know. It could be a year, 10 years.

ZAKARIA: Robert Baer, a pleasure to have you on.

BAER: Thank you.

(COMMERCIAL BREAK) ZAKARIA: Now for my "What in the World?" segment.

This week it should probably be called "where in the world," by which I mean, where in the world is Ayatollah Sistani?

He is an Iranian ayatollah who is crucial to the current crisis. He's the most respected religious figure in Iran.

The problem is he doesn't live in Iran. He lives and studies and teaches next-door in Iraq, in Najaf, the most holy city in Shia Islam.

Sistani is probably the most important Shia cleric in Iraq. Indeed, he may be the most important Shia cleric in the world. His power and reach and respect in the Shia world are somewhat similar to that of the popes in the Roman Catholic world.

And remember, Iran is a Shia nation. So, while Sistani hasn't made any public statements about the current turmoil in Iran -- and he probably won't unless things get much, much worse -- where he stands on it is actually quite clear. Sistani simply does not agree with the way Iran is run today. He believes strongly that religious authority should be separate from political authority, that clerics should step into politics only when they see something un-Islamic taking place.

This careful balance of politics and religion is the Shia way and has been throughout history, only to be upset by Ayatollah Khomeini in the Iranian revolution in 1979.

In the new Iraq, Sistani has been instrumental in fashioning a system that goes back to that Shia tradition. Doing so was a blatant rebuke of the Iranian system. And while Iraqi politics surely has a long way to go, Iraq's careful balance that Sistani helped to craft is working there.

On the streets of Iran, the protesters surely know about what's happening in Iraq and take strength from Sistani as they try to make his vision of Shia Islam come true at home in Iran as well.

A sign of his power: when Iranian politicians come to Najaf, they always ask to meet with Sistani. He's met with the speaker of the parliament, Ali Larijani. He's met with the foreign minister, Mottaki, and on and on.

But when President Mahmoud Ahmadinejad came to Iraq, Sistani declined to meet with him.

And we will be right back.

(BEGIN VIDEO CLIP)

PAUL KRUGMAN: You really do need to do drastic things now. This is scary stuff. We've been staring into the abyss.

(END VIDEO CLIP)

(COMMERCIAL BREAK) ZAKARIA: We're in an era of great prize fights these days, except that they are unusual in that the prize fighters are economists. Conservative and liberal economists now disagree on the origins of the financial crisis, the bank bailout, the need for deficit spending and the proposed health care plan.

So, we have organized a titanic face-off between two of the most famous economists in the world on either side of these debates.

The Nobel Prize winner and "New York Times" columnist Paul Krugman on the right -- but actually on the left -- he's the bigger stimulus side. And Stanford University scholar John Taylor, he is the monster deficit side.

Welcome, gentlemen.

Let's start with the origins of the crisis. You wrote a book where you say the crisis is fundamentally caused by government, not by the market.

I think it would be fair to say that governments around the world learned the lessons from the 1930s, or learned what they thought the lessons of the 1930s were, and have reacted very strongly. They've pumped massive amounts of liquidity into the system.

Is this a good idea?

JOHN B. TAYLOR, SENIOR FELLOW, HOOVER INSTITUTION: No. I don't think it is. I think basically it's a large overreaction.

You know, even last year, in February, a stimulus package was passed -- a lot of enthusiasm for it. Checks were sent to people. It didn't do anything.

PAUL KRUGMAN, NOBEL PRIZE-WINNING ECONOMIST, "NEW YORK TIMES" COLUMNIST: You had to do pumping massive amounts of liquidity into the system. And this has been, you know, this has been really bad.

If you look at it from a global point of view, the fall in industrial production has been every bit as large as it was in the first year of the Great Depression. The fall in trade has been larger than it was in the first year of the Great Depression.

You really do need to do drastic things now. This is scary stuff. We've been staring into the abyss.

ZAKARIA: You say that in doing all this you are creating the risk of inflation.

TAYLOR: I believe you are. I think we're -- a mass of deficits. The debt-to-GDP ratio, a good measure of our ability to pay is GDP, so it's gone from roughly 40 percent to 80 percent.

Quite frankly, if you go back to my analysis of why this was caused, I think it was really an over-reaction by government. It scared people. The markets collapsed last fall, especially in September and October.

That's when you see these big declines Paul is referring to, exports declining and consumption -- and I think it basically stabilized in early as December and January. We don't know what's going to happen...

ZAKARIA: But you're saying that it was Hank Paulson and Ben Bernanke going up to Congress and scaring the hell out of them to get the $700 billion that sent the economy into a shock.

TAYLOR: A big part of it, absolutely.

ZAKARIA: Now, let me ask you this. You were very, very unhappy with the administration's plan to deal with the banking crisis.

KRUGMAN: Right.

ZAKARIA: You wrote this very famous column which said this whole -- the plan fills me with despair. You said that you needed to nationalize the banks temporarily to deal with the problem. The banks haven't been nationalized.

It appears that the financial system has stabilized and credit is coming back. So were you wrong then, or are you wrong now?

KRUGMAN: You know, I think I was -- put it this way. First of all, it's not at all clear that credit is coming back. What we see is some recovery in some markets. And it may be that it works out all right, but the banks are still weak. They're still kind of crippled.

I wanted a much more aggressive response. I still think that would have been the right thing to do, given what we knew. It's by no means clear that we're out of the woods.

Look, they might, I think -- you know, you can always go through my record and find out that I didn't say this -- but I think I conceded that it might work out, but that it seemed to me that the riskier course was, in fact, to hope for the best as opposed to taking really firm action.

At this point, I'm not pushing hard on it, because it's clear that they're going to wait and see.

ZAKARIA: And do you feel like the financial industry is stabilizing?

KRUGMAN: The way I look at it is, I'm not sure what's happening with the financial industry. What I do know is that the real economy is nowhere close to stabilizing.

We just got a new report on new unemployment claims, which are still running at a level suggesting that the economy is hemorrhaging jobs. This is still nowhere near -- no green shoots -- those green shoots look awfully brown from here. There is no sign that even that things have stopped getting worse at a rapid pace. So, we have not done enough. Now, maybe a more forceful bank policy would have helped. I also thought the stimulus wasn't big enough. And this is going to be a real problem, because when the stimulus isn't big enough, people don't respond to the outcome by saying, oh, we need to do more. They respond by saying, oh, the policy failed.

So we have in fact fallen short. I'm quite concerned that Obama, although doing things in the right direction, is behind the curve, because they haven't been big enough.

ZAKARIA: Do you think that the economy has stabilized?

TAYLOR: I saw stabilization really back in late December, January. You had a real collapse -- exports, consumption. It sort of flattened out. It's picked up slightly. But I agree, there's going to be some tough times ahead.

ZAKARIA: But it sounds to me like you're saying we had a financial catastrophe, but we're going through a kind of somewhat normal, worse than normal recession.

TAYLOR: It's worse than normal, because of the catastrophe. Absolutely.

But we're now in a period where we should be able to see some growth in the third and fourth quarter. But it's not going to be strong, and we will get increases in unemployment.

And in the meantime, I think the stimulus is not helping. I actually think it's somewhat counterproductive.

ZAKARIA: How can it not help? I mean, you're creating demand.

TAYLOR: Well, actually, quite a little bit, quite frankly. When you go to the White House Web site, of the $787 billion package, only 53 has gone out the door and only, believe it or not, less than a half a billion, $373 million, is infrastructure spending so far. So, it's just not enough to do anything substantial.

KRUGMAN: But we knew that was going to happen, right? It was essentially impossible to have a lot of spending take place before six months in.

TAYLOR: A lot of things were promised. I think people...

KRUGMAN: No, they were pretty clear on it. I mean, they did -- they low-balled their forecast for what unemployment would do, which is a problem. But this is what we all said, this is going to be a slow time.

And it is kind of crazy, by the way. I mean, you have people saying, "Oh, it's four months since Obama signed this bill, and where's the recovery? The plan has failed."

We actually haven't had a chance to test it at all yet. TAYLOR: Well, I think that's part of the problem with the policy. You just can't deliver that rapidly. So, in the meantime, it could come too late.

And in the meantime, you get higher interest rates from this. This is no question...

KRUGMAN: I don't buy that at all.

TAYLOR: And oil prices are rising.

ZAKARIA: OK, let's get...

TAYLOR: (UNINTELLIGIBLE) the rest of the economy.

ZAKARIA: Let's get to interest rates in a second.

But what's wrong with the argument that, if what you're trying to do is create a rapid increase in purchasing power, that a tax cut, a permanent tax cut would actually deliver it faster?

KRUGMAN: Gee. So, we do a permanent tax cut every time the economy is weakening. And then what do we do when the economy is strengthening? Have a permanent tax increase?

But then, in that case, it's not -- you know, there's a logical problem here. You can't have a ratchet where you always cut taxes and never raise them. Eventually, we end up with no government at all, which is, I guess, some people's goal. But you can't do that.

TAYLOR: I think it would have been...

ZAKARIA: As somebody who wrote, arguing for a permanent tax cut...

TAYLOR: Absolutely.

ZAKARIA: ... what do you think?

TAYLOR: I think, actually, I recommended that President Obama come in and get this middle class tax cut established permanently at the beginning. His Make Work Pay credit would have been good. It would have been permanent. It would have been something that people could have counted on. I think that would begin to have some more effect than what we're seeing so far.

ZAKARIA: But wouldn't that have effects on the deficits that you worry about?

TAYLOR: I think the only problem with the deficit now, quite frankly, is just massive spending growth. We have a deficit of $1.2 trillion forecast by the CBO 10 years from now. And tax revenues then, income tax, about $2 trillion.

So, you'd have to have a 60 percent -- six zero percent -- increase in taxes to close that deficit. That's not going to happen. So, it's really to me, it's a spending issue.

KRUGMAN: You know, these are all nominal figures. The fact of the matter is that we're still in the United States, we're spending not a high proportion of GDP by comparison with other advanced countries, not all that -- you know, this is -- the point is that we do have some things that we want the government to do.

We want it to provide a basic social safety net. We want it to provide adequate national defense. You have to raise the taxes to pay for that.

And you can't just decide that we're going to set tax levels based upon -- permanently set tax levels -- based on what the state of the business cycle is right now. That's not -- that way lies madness. That way lies the impossible task of trying to fit your long-term spending plans to what you do in the heat of the moment to respond to a business cycle.

This is why you need spending programs to fight this kind of recession.

ZAKARIA: We will be back with our clash of the economist titans right after this.

(BEGIN VIDEO CLIP)

KRUGMAN: Advanced countries don't do this to their citizens. Right? There is no reason why we should not have a guarantee of essential health care for every American.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

ZAKARIA: And we are back with our prize-fighting economists, Paul Krugman versus John Taylor.

Explain why you think that, even though we do have these large deficits, and the entitlement programs suggest even larger ones, right now you don't think that interest rates will rise in a way that will choke off growth.

KRUGMAN: Let's look at what's moving the interests, you know, day-by-day, week-by-week. You can see what's happening.

So, last week, interest rates, long-term interests rates rose at the end of the week. What was driving that? Quite clearly, there were a couple of economic reports that came in that seemed more favorable than people expected. They were, you know, the Philadelphia manufacturing survey and a couple of other things came in more favorable. People got more optimistic.

Now, if it was about deficits, interest rates should have gone down, because if the economy is going to be stronger, we're going to have more revenue. The deficits are not going to be as big as we thought. Instead they went up. So, what was actually driving it? Well, people were thinking that the Fed is likely to come off its zero interest rate policy sooner. So, those rising interest rates were not about fear of deficits, they were about optimism about the economy.

This week, interest rates came down. What was driving that? Well, there was some bad news about the economy. Several surveys, several other pieces of information came in weaker than expected.

Again, if you really thought it was about deficits, the interest rates should have gone up, because the deficit is going to be bigger if the economy doesn't recover.

ZAKARIA: And presumably, your argument -- which I'm now just going to state, because I've heard you saying it -- is that interest rates were abnormally low, that what they're now returning to. So, to regard it as a rise is unfair. They're returning to kind of normal levels, and that the interest rates a month ago were pricing in the end of the world, and that that scenario has gone away.

TAYLOR: Well, also, the weak economy interest rates are low, because...

ZAKARIA: But isn't it fair to say that interest rates where they are, they're not a danger to growth right now. They're still very low.

TAYLOR: We've seen some signs of interest rates increasing to some extent, because of people talking about the debt increase. And there's no question, you can look at some time -- that's what I look, over this period of time -- more and more concerned about the debt.

Look at the public opinion polls. People are talking about the debt. Those are the people who are doing the investing.

ZAKARIA: All right. What does this do...

TAYLOR: And I think it's -- there's no question that the interest rates will increase if we continue to borrow so...

ZAKARIA: What does it...

TAYLOR: Just one more thing.

ZAKARIA: Yes, yes.

TAYLOR: We have to send our secretary of state and secretary of treasury to China, to tell them to buy our debt. That's the kind of thing we're going through.

KRUGMAN: But the reality is we're borrowing only about half as much from China as we were before the crisis.

I mean, the fact of the matter is we found this collapse of private borrowing -- total collapse of private borrowing. Net borrowing by the private sector is now negative. So, the public sector has moved in. It's doing a lot of borrowing. But overall -- in a way, you say, well, the Japanese were able to finance this out of their own savings. So are we, in fact. We're not -- if you look at the changes, all of the increase in government...

ZAKARIA: Explain why we are now not selling as much debt to the Chinese.

KRUGMAN: Because families, households, who had a zero savings rate before the crisis, have suddenly discovered the need to save, and are up to something like 6 percent now. Because corporations...

ZAKARIA: And that means they're buying up government debt. The banks did that...

KRUGMAN: Well, or at least they're putting their money in banks, and the banks are putting their money -- depositing at the Fed, and there it goes.

Corporations are not borrowing for investment, because they've got the lowest capacity utilization on record. They're not building stuff, so they don't want to borrow. They don't need to borrow.

People are not building houses, which means they're not borrowing to buy houses, which means that -- all of these ways in which the private sector was borrowing have gone down. The private sector is saving much more than it did before.

Government has stepped in, is doing a lot of borrowing. In a way, that's the whole point of fiscal stimulus, is that the government will do the spending and borrowing that the private sector will not.

And our actual dependence on foreign investors to buy our bonds is way down. If you ask who's paying for this, it's not the Chinese. It's us.

ZAKARIA: All right...

TAYLOR: They're not buying our debt. That's one of the problems. That's why they're over there asking them to buy more.

ZAKARIA: We've got to talk about one thing we are certainly going to have to pay for, which is health care reform.

You don't like the Obama plan, I take it.

TAYLOR: Well, related to the deficit, of course, it's going to cost a lot. CBO has estimated $1 trillion, $1.6 trillion, depending on the plan.

So, yes, I think there's a lot of things that need to be looked at just relating to our previous conversation about spending. And there are some efforts to try to contain it, but right now I don't see that. I think a plan has to come out here which doesn't just mean more and more spending without a final way to keep costs down. ZAKARIA: Paul, Robert Samuelson -- "Washington Post," Newsweek columnist, a sober guy -- says of Obama's health care reform, it is naive, hypocritical and simply dishonest. And basically his argument is that it pushes off all the hard decisions about costs and things like that.

KRUGMAN: I ...

ZAKARIA: But you like it. You...

KRUGMAN: Yes, I mean, I'm concerned that he's going to not do enough about universality and not enough about costs. So we need to see.

But look, a few things we know. Some of the things that are most controversial are actually cost-saving measures. If we're going to have a public option, a strong public option, that's almost certainly going to reduce costs. That's one of the things that will actually make it cheaper.

ZAKARIA: Why?

KRUGMAN: Because the public option, first of all, it will discipline the insurance companies. In a lot of places there's no effective competition in the insurance market.

When I see Senator Grassley talking about free market competition, I take a look at the AMA's figures, and see that, gee, one insurance company has 71 percent of the market in his state. Right?

So, with more competition, it would be a plan that operates which much lower marketing, administrative, overhead costs. And...

ZAKARIA: Why would a government plan have lower...

KRUGMAN: Oh, this is one of the things we know. In this case, the private sector is bureaucratic and has huge administrative costs, and the public sector does not.

Private insurance companies spend 14 percent of their revenues on administration. Medicare spends 3 percent. And that's because -- fundamentally, it's because private insurance companies spend a lot of money trying to figure out who really needs health insurance, so as not to give it to them.

All the evidence suggests that more government intervention is actually going to reduce costs, not raise them.

TAYLOR: Well, I don't see how you can think that government is going to do a better job of...

KRUGMAN: But it does.

TAYLOR: ... operating health care in this particular market...

KRUGMAN: But it does. Medicare is more efficient than private insurance.

(CROSSTALK)

TAYLOR: (UNINTELLIGIBLE) a really different market.

Also, in terms of competition...

ZAKARIA: But does the consumer have any ability to really have knowledge, have power to exercise -- to bring costs down? I mean, at least in health care, he hasn't over the last several years.

TAYLOR: Well, he doesn't have -- it's an incentive issue in terms of giving the consumers more incentive. That's one of the -- why that I think these policies and proposals to actually transfer some money -- remember, John McCain had a proposal where you'd have a credit for people to buy that (ph) insurance.

ZAKARIA: Yes, but I just think about this personally. If a doctor -- if my doctor told me to take three tests, am I really in a position to say to him, well, actually, the statistical data suggests that I don't need the second and third tests? And you're going to do what your doctor tells you to do. Right?

TAYLOR: If you can afford it, if you have the most expensive health insurance in the world, sure you can. But most people don't. And so, we have to figure a way to find the best health care.

KRUGMAN: There are large numbers of Americans who either don't have health insurance, or who, when push comes to shove, when emergencies happen, discover that the insurance they have -- which they might have been happy with until it was tested -- turns out to be inadequate.

And advanced countries don't do this to their citizens. Right? There is no reason why we should not have a guarantee of essential health care for every American.

ZAKARIA: And we're going to have to leave it at that. I will leave it to the viewers to decide who won.

Thank you all very much. We will be right back.

(COMMERCIAL BREAK)

ZAKARIA: Now for our "Question of the Week."

Last week, I asked you what you thought people from outside Iran could do to help those inside Iran who want change. Many of you said, "Do nothing."

You seemed to agree with President Obama's original position, that any outside action would simply be used against the protesters as fodder for the regime to accuse the U.S. and other countries of fomenting unrest inside Iran.

For this week's question, I want to ask you about the way we are learning about what's happening in Iran. Reporters are now not really allowed to cover this story. So the only source we have is the people and the recordings they make, and the pictures they make and send out onto the Internet.

At one level, it is raw, unfiltered news. But on the other level, it's not professional journalism. It's not always possible to tell exactly what's going on, to be sure about those images.

Do you feel you're getting the story? And if so, are you getting it more or less clearly than you would get it from us, from traditional news media sources?

Let me know what you think about all this.

And as always, I'd like to recommend a book. It's called "The Education of an American Dreamer," by Peter Peterson.

Pete is a very well-known investment banker, former secretary of commerce, the founder of the Blackstone Group. He's written several books on other important subjects -- I think four books on the national debt. Those books are very important, but they are not the most readable in the world.

This one is fascinating. It is his personal story, a rags-to- riches tale about a farm boy from Nebraska who makes it big. It's a charming, uniquely American story, really well told. I enjoyed it. I think you will, as well.

Now, they said it would never happen, but it has. That's right. We have recently joined the social networking revolution. You can follow us on both Twitter and Facebook. Go to our Web site, cnn.com/gps, for links and information. When you're there, make sure you try your hand at our weekly world affairs quiz, the Fareed Challenge.

Thanks for being part of my program this week, and I will see you next week.

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