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FAREED ZAKARIA GPS

Afghanistan: The Battle at Wanat; Taliban Use of the Web; U.S. Economic Recovery; Global Economic Recovery; India-Pakistan Relations

Aired October 18, 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, GLOBAL PUBLIC SQUARE: This is GPS, the GLOBAL PUBLIC SQUARE. Welcome to all our viewers in the United States and around the world. I'm Fareed Zakaria.

This week, the Dow Jones Industrial Average rose to 10,000, a market last hit in October, 2008 -- in that case, of course, moving in the opposite direction. It's not just that the Dow Jones is up, but many of the indices of economic wellbeing are back to pre-crisis levels.

In fact, one year after the collapse of Lehman Brothers, the biggest surprise to many observers has been just how quickly things have settled down.

One of the central predictions made by many gurus, including those who had accurately predicted the financial crisis, was that the emerging markets -- China, India, Brazil -- would collapse. That was how things had always worked. When the West sneezed, the rest caught a cold.

This time, something quite different happened. The West got seriously ill. But after a few months of panic, the emerging economies shrugged off the panic and continued to grow robustly. China will grow somewhere between 7 and 8 percent this year, India between 6 and 7 percent, Indonesia close to 5 percent, and growth prospects remain good in many of the larger emerging markets.

One example, in its worst quarter in this crisis, India still grew at around 5.5 percent. Car sales in India are currently up 25 percent above last year, with no government program that bribes consumers to buy cars.

So, one of the strengths of the current system that we have is that the rest of the world is doing well, and that has helped stabilize the global economy, providing growth and cash. See, most of America's largest corporations now get 50 percent or so of their revenues from abroad. So, if the rest do well, we thrive.

We'll discuss all this on our economic panel. But meanwhile, we get to the world of bombs and instability. And at the center of it, of course, is Pakistan, which appears to be verging towards greater chaos this week -- more terrorist attacks, more bombs. And, of course, no discussion of Pakistan can ever be done without bringing in Afghanistan. I have a fascinating, close-up look at a key battle in Afghanistan, which will shed light on exactly what is happening. And we have a conversation you will not want to miss with the Indian foreign minister.

Let's get started.

(BREAK)

ZAKARIA: We spend a lot of time on this program, and around the media in general, looking at the war in Afghanistan from 30,000 feet -- looking at the big picture, the big questions.

Today, I want to do something different. I want to examine one battle from the war in Afghanistan. It may be the key battle. And I'm going to use it to shed light on America's problems in that country.

Wanat is a town in northeastern Afghanistan by the Pakistan border. The battle there was one of the deadliest skirmishes of the war. Nine U.S. soldiers died in just over two hours.

To get an idea of what was going on there, listen to some of the transmissions between the men pinned down on the ground and the helicopter pilots flying above that day, who didn't get to Wanat until most of the U.S. soldiers were already dead.

(BEGIN AUDIO CLIP)

GROUND: Be advised, we're in a bad situation, that we can't really spots on rounds.

HELICOPTER: I think they're pinned down good, bro. I don't think they want to lift their heads.

I tell you what, man, Dustoff, if you're going in there to do any type of hoist at all, that's going to suck.

GROUND: I need some help with visibility, because I don't have comms with my O.P.

HELICOPTER: Dustoff 3-5, we're taking fire. We just got hit in the lower belly, just to the north side of the aircraft.

GROUND: Dustoff! Chosun (ph) 2-1 Bravo! Hey, the L.Z. is 100 meters to your nine o'clock. You're landing on (UNINTELLIGIBLE). We just took a lot of fire there. Do not land there!

HELICOPTER: Move out, Dustoff. Don't land there.

(END AUDIO CLIP)

ZAKARIA: Tom Ricks joins me now to make sense of all this. He is by common consent the best defense reporter in America, having covered the U.S. military for almost 20 years, first for the "Wall Street Journal," then the "Washington Post." He's written four highly acclaimed books, including "Fiasco" and "The Gamble," both about the Iraq war. He is now senior fellow at the Center for a New American Security, which is a think tank based in Washington, D.C.

Tom, let me ask you first, why is this battle important? What are the themes we should be looking at as we peer more closely at it?

THOMAS E. RICKS, AUTHOR AND SENIOR FELLOW, CENTER FOR A NEW AMERICAN SECURITY: It's significant, because it's representative of several things. And it shows you why this war is so difficult and how things can go wrong.

The Afghans have survived by smart -- by observing. They know how Americans fight. They know the intervals they have in which to attack. They know where the American weaknesses are -- communications, heavy weapons.

And things like overhead reconnaissance means you attack ideally in bad weather, like the attack a couple of weeks ago, when it's really hard for the helicopters to get in the mountains. You go after their communications, and then you go after their heavy weapons.

You see this again and again.

These are smart fighters. They fought the Soviet Union, then they fought each other, and now they're fighting us.

ZAKARIA: And so, what should we be looking at? What's going on there?

July 2008, 49 soldiers get orders to establish a base in Wanat. Why are they going to Wanat?

RICKS: At the time, they thought they were doing counterinsurgency. Here we're going up the valley. And they're going way up into this valley. And there's Wanat village up above there. You can see it's way up in the mountains.

Well, this is a corridor that Taliban and Taliban allies have been using to come from Pakistan over into Afghanistan. The U.S. decides, let's go up in there and interfere with their movements.

ZAKARIA: It's a kind of supply route that they're trying to block?

RICKS: Yes. It's a corridor that they're using to come -- and the Americans want to get in there and make it more difficult for then.

ZAKARIA: So then, July 13th, the day of the attack, what happens?

RICKS: They had a lot of foreboding. In fact, one of the -- the commander of the platoon, Lieutenant Brostrom, told his best friend, "I think we're going to get messed up" -- although he didn't use that term -- "messed up badly up there."

And he was right.

Right at dawn, at about 4:20 a.m. there, a volley of perhaps 200 rocket-propelled grenades started coming in on them -- very well done, very sophisticated. The Taliban had crept up close, because they didn't have enough troops to put up patrols up there, because they were so busy building their base.

So, the Taliban fighters had crept up close and aimed their rocket-propelled grenades at exactly the right targets -- the heavy weapons, the anti-tank rocket launcher, the 50-caliber machine gun. They knew what they were doing: take out the heavy weapons first, and then deal with the lighter stuff later.

ZAKARIA: And how long did the battle last?

RICKS: The intense battle lasted about an hour, because -- another point of sophistication -- the Taliban, I think, had observed that it would take about that time for American attack helicopters to get there. So, they knew they had a window of opportunity.

In that hour, nine American soldiers were killed, another 27 were wounded, which made for 75 percent casualties.

ZAKARIA: Now, did they fortify themselves? How much fortification was there?

RICKS: They were working really hard to fortify themselves.

And by the way, in all of the discussion, I have no criticism of the soldiers on the ground. They were in a difficult situation. They're doing the best they can. They were working really hard. But they were really put in a difficult spot.

They didn't have enough water to keep themselves hydrated while digging and filling sand bags in heat that ran over 100 degrees in the high mountains of Afghanistan. So they were desperately trying to secure themselves, aware that the locals were hostile, fearful of the situation.

ZAKARIA: Now, two weeks ago, we had a similar battle in another town a little bit north of Wanat. What happened there?

RICKS: It was very similar, very sophisticated knowledge. And I think the fighters attacking them up there knew that the Americans were beyond the reach of artillery. And that meant, again, you had a window of opportunity until the attack helicopters arrived to start pushing you back.

This was an even tougher fight. It went on for many, many hours, despite the fact that the helicopters were overhead. It was a similar result, that the base wasn't taken, but the base was abandoned shortly thereafter.

Which raises another question that General McChrystal is considering right now. Tell me exactly why we're in Nuristan. I understand why we're in Afghanistan, but why in this part of Afghanistan?

Is this really counterinsurgency you guys are doing up there, or are you simply sticking your fist into a hornet's nest?

ZAKARIA: So, let's delve into that.

The argument would be made, if we were not to be here -- if we were to, say, cede these areas, which are very sparsely populated, there are very few people -- the argument is the Taliban will assert control there. Potentially, al Qaeda or other terrorist groups could set up training camps, and things like that.

What's wrong with that argument?

RICKS: There's nothing wrong with it. That's probably what would happen.

But I think what you're seeing is General McChrystal considering, given the limited number of troops I'm going to have, what's the best use of them?

One use might be, OK, let's pull back from those areas and focus on an ink spot, classic counterinsurgency approach -- Kabul, the Khost bowl, the area southeast of Kabul, and Kandahar. Put your troops, put your resources there, and do classic counterinsurgency there...

ZAKARIA: That is, provide security for the people there, and that is the vast bulk of the population of Afghanistan.

RICKS: Exactly.

And then, in more rural areas, pull your troops back, do a kind of triage, but use counter-terror against them.

ZAKARIA: So, if you saw a terrorist base being set up in Nuristan, go in with attack helicopters, destroy it, but get back out.

RICKS: Yes. I would call this, do the Biden plan for areas like Nuristan, do the Petraeus plan for areas like the major cities and other population areas.

ZAKARIA: What does it say about the Taliban and its military tactics? When you watch what you're describing, should we be wowed by the level of sophistication? Or is this just street smarts?

RICKS: I think we've consistently underestimated Afghans.

I used to live there when I was a teenager. And one thing I learned there is...

ZAKARIA: You lived in Afghanistan when you were...

RICKS: Yes, from 1969 to '71, in Kabul. My father was a professor at Kabul University for two years. I was actually a member of the Afghan ski patrol, junior grade, and skied in the Salang Pass.

A lot of Afghans, though, are illiterate. Illiterate does not mean stupid. In fact, I'm not even sure it means uncultured.

The average Afghan probably knows more poetry by heart than hardly anyone in America. You can run into Afghan tribesmen who know hundreds of poems and thousands of proverbs. And we would consider in their conversation quite literate.

Even when I lived there, it seemed to me that guerrilla warfare was the Afghan national sport.

One of my favorite books on this region is by John Masters. It's called "Bugles and a Tiger." It's a memoir of being a British officer with a Gurkha regiment in Waziristan in the 1930s. At the end of that last war that the British had there, the Afghan cousins showed up rather angrily and confronted him.

"Where are our medals," they said.

He said, "Well, you were the enemy."

And they said, "No, no. You gave medals to the Pashtuns on your side. We want our medals, too. You couldn't have had a good war without us."

This is very much the Afghan attitude. This is a kind of sporting event for them in many ways.

ZAKARIA: Tom, thank you very much. This was fascinating.

Now, shortly after the attack on Wanat, the U.S. military pulled out of the village, then out of the entire valley. To this day, they have not returned.

Two weeks ago, at the request of Admiral Mike Mullen, the chairman of the Joint Chiefs of Staff, General Petraeus opened a new investigation into the battle, and he appointed a three-star general from the Marine Corps to oversee it. We'll keep you informed when the results of that investigation come in.

Now, to read more about the battle of Wanat, to get the book that Tom suggested, go to our Web site, where you'll find links to some of the best reporting on this subject.

And we will be right back.

(BEGIN VIDEO CLIP)

PETER WALLISON: Under certain circumstances, people can lose confidence in the dollar.

SKIDELSKY: Especially if people say so.

WALLISON: Well...

(LAUGHTER)

(CROSSTALK)

WALLISON: I mean, there's no shortage of...

(END VIDEO CLIP)

(COMMERCIAL BREAK)

ZAKARIA: I mentioned earlier on the program that the Dow Jones hit 10,000 this week. And I told you what I think, but not everybody sees it exactly the way I do. Alas.

So, I have invited some very smart people to help discuss the economy and where it is. They all have a long list of credentials and great books, which we will put up on the screen and feature on our Web site. But I'm not going to, therefore, spend a lot of time introducing them.

John Micklethwait is the editor of the great magazine, "The Economist."

Zachary Karabell runs River Twice Research. He's been on the program before and has been bullish when everyone else was gloomy.

Peter Wallison is the director of financial policy studies at the conservative think tank, the American Enterprise Institute.

And Lord Robert Skidelsky is a British historian who has written a monumental biography of John Maynard Keynes, and a new book on Keynes as well.

Welcome gentlemen.

At the end of next year, almost all of the stimulus money will have been spent. And at that point, the end of 2010, the question becomes, will the American consumer be spending money again?

This is a consumer that is maxed out, still laden with a lot of household debt, and to whom banks are not yet extending credit. If you try and get a credit card in America these days, it's very tough.

If the consumer doesn't start spending, that's 70 percent of the economy, John. Does that bring us back down?

JOHN MICKLETHWAIT, EDITOR-IN-CHIEF, THE ECONOMIST: Well, he ought to be really pessimistic. You look at the savings rate, and the savings rate went down to zero percent, which everyone agrees was unsustainable. And it's gone back up to around 5 percent. And people say, well, it might go up to 7 percent, or somewhere around there, which was a sort of rough average before.

But, you know, what happens if, actually, America goes back to be a nation of savers? What happens if it goes up to 10 percent, 12 percent?

And that could have a dramatic effect on...

LORD ROBERT SKIDELSKY, HISTORIAN AND KEYNES BIOGRAPHER: Then you need a larger stimulus...

MICKLETHWAIT: Exactly.

SKIDELSKY: ... if that is the trend, because...

ZAKARIA: But the government will be running deficits in the range of 12, 13 percent of GDP by then.

SKIDELSKY: So what?

ZAKARIA: So, you say just -- deficits don't matter, as Dick Cheney said to George Bush?

SKIDELSKY: Deficits don't matter when the economy is on the slide. Deficits matter enormously when you approach full employment again. And then, the national debt doesn't matter when you're on the slide.

Growth is the solvent for these problems. If the economy can be got growing again, then these huge totals of trillions that everyone is alarmed about shrink naturally.

PETER WALLISON, DIRECTOR OF FINANCIAL POLICY STUDIES, AMERICAN ENTERPRISE INSTITUTE: It's very difficult to imagine...

ZAKARIA: So, this was the purest expression of Keynesian on the table yet.

(LAUGHTER)

What do you think?

WALLISON: First of all, it's very difficult to imagine the economy starting to grow very quickly without some kind of recovery in the financial system. The financial system is still in trouble. The financial system is necessary to make business go, to provide the capital and the funding to business.

I don't see that happening. And so, I don't see this recovery occurring. And therefore, everything you say about the deficit is true, except for the fact that there will not be the kind of recovery that could erase this deficit.

SKIDELSKY: So, but how do you -- if you say there's no prospect of recovery, because the financial system is wounded, and, therefore, it will remain wounded for some time, are you saying that there's going to be no growth in the American economy for the next 10 years?

WALLISON: I'm saying that it's going to be a long time before we begin to grow again at any rate that reduces unemployment.

ZAKARIA: But doesn't that make his counsel more urgent, which is that the government should do a big second stimulus? Are you in favor of...

WALLISON: No, because under certain circumstances, people can lose confidence in the dollar...

SKIDELSKY: Especially if people say so.

WALLISON: Well...

(LAUGHTER)

(CROSSTALK)

WALLISON: There's no shortage of people who will say so.

But the danger is that people will say the United States is going to -- as soon as recovery starts in the United States, we are going to get ourselves out of our deficit problems and out of our debt problems by inflating the currency.

SKIDELSKY: Yes, but we always get out of debt by inflating the currency a bit.

You know, our inflation target is 2 percent. You can work out, if you have inflation at 2 percent and growth at 2 percent, the debt comes down. And, you know, that's happened historically time and time again.

ZAKARIA: But let me ask a question to you, Robert, which is, the difference between the 1930s and now is that the United States is operating in a much more globalized world in which it is selling its debt to other countries -- I mean, a lot of it to its own people.

If you were to have these large deficits, is there a danger -- I mean, whether it's the dollar, whether it's U.S. Treasury bills -- is it possible to sustain these large deficits in a global economy where people are, in effect, casting their vote on the dollar, on American Treasury bills every day?

SKIDELSKY: Well, if you think that the government is about to go bankrupt or is likely to default on its debt, well, then, of course, you can't. But I don't think we're there. I don't think we're anywhere near there.

I think people do. I don't think anyone believes that the United States government is going to default on its debt. I don't think it has to. And I think the cost of its debt hasn't been going up.

MICKLETHWAIT: The bond markets think that they're going to inflate their way out. And that's where they could get (ph) punishment (ph).

ZACHARY KARABELL, PRESIDENT, RIVER TWICE RESEARCH, AND AUTHOR, "SUPERFUSION": Yes, but there, I'm not sure there's very much of a risk, because there is the reality of the dollar as the only viable global currency, which demands its use by people who otherwise might not want to use it. I think the issue of deficits is less -- and I would agree with Lord Skidelsky -- that it's less about the size or it's taking them on. It's that, if the underlying growth over a much longer term doesn't justify those, i.e., if we're unable long term to grow our way out of them, then you have a problem.

Plus you have the burden of the fact that, because the dollar is the currency of last resort, and because the Chinese need to park their reserves somewhere, our ability to take on this debt is likely to be, if not limitless, much, much more expensive than our potential to pay it back.

ZAKARIA: And the scare scenario here is something you mentioned in a recent "Wall Street Journal" article. Remind people of what happened when Great Britain asked the United States for a $5 billion loan in 1946.

KARABELL: Right. What you'll remember, at the end of this long period of close relations between Britain and the United States -- for 30 years, during two wars with Germany, where the United States was very much a financial, trade, military partner to Britain -- the British treasury was depleted at the end of World War II, turns to the United States for a bridge loan to meet their obligations, fully expecting the United States to do what it had always done and provide the $5 million (ph), and the U.S. says "no."

The British come back and say, "We cannot pay our obligations. We're going to default."

And the Americans say, "Fine. We'll lend you a little less money at a higher interest rate, and you have to end the pound sterling as the currency, abide by Bretton Woods, and you have to end this system of imperial preferences."

And that's a wonky thing. But what it meant, really, was the British have to end their empire in order to pay their bills.

SKIDELSKY: Well, I don't think the Chinese are about to tell the Americans to end their empire or we won't lend you anymore money.

KARABELL: No. But is this 1915 (ph)? I mean...

SKIDELSKY: No, but it is an interesting parallel, of course.

But I think, to get back to an earlier point, I mean, the only reason for running great deficits is to get the economy growing again.

I think I agree with Larry Summers. I think that the stimulus, so far, has averted a slide, really, a slide down into a great depression.

But it hasn't actually yet produced any really vigorous growth, which, to my mind, if what you say is true, and that the banking system isn't going to respond quickly to all this money being poured into it, that is an argument for another stimulus. WALLISON: Every time you take funds out of the market to provide more stimulus by borrowing it, you are reducing the amount available to the private sector to create the jobs.

SKIDELSKY: Not if you're printing money. Not if you're printing money.

WALLISON: Well, then, if you're printing money...

SKIDELSKY: You are printing money.

WALLISON: ... you're raising exactly the question -- of course we are. But it raises exactly the question of when people start to lose confidence in the dollar and charge more interest on what we have to pay to borrow.

ZAKARIA: All right, we are going to have to take a break. And when we come back we will talk about the politics of all this, about Obama, and also what is going on outside of the United States.

(BEGIN VIDEO CLIP)

SKIDELSKY: Why is Reagan allowed to run huge deficits, but not Obama?

WALLISON: Because it's how you run the deficits. Reagan didn't run the deficits by spending. He ran the deficits by cutting taxes.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

ZAKARIA: I am back with John Micklethwait, Zachary Karabell, Robert Skidelsky and Peter Wallison, all great experts on the economy, which is why we are going to turn to politics.

(LAUGHTER)

Does this mean -- you know if we look at the economy as we were describing it, things have stabilized. At some level the world of capital is doing well. Companies are doing better. But unemployment remains persistent.

Is this a huge problem for Obama? Or is he going to get credit for having saved, avoided a great depression?

WALLISON: No credit, no credit. I mean, he can say it, but he's not going to get credit for avoiding a depression that nobody actually saw.

I think he's got...

ZAKARIA: Wait. Lots of people thought there was going to be...

WALLISON: Well, people thought. But actually, this particular recession that we are in -- and as far as we've gone so far -- is not as serious as the one between 1980 and 1982, or '79 and '82, when we went to unemployment of 10.6, and we had inflation of something like 15 or 16 percent at the time. That was a very serious problem.

This one is far less. And the problem here, I think, that he faces, is that he's not producing the environment in which people will actually invest and create new jobs. So...

ZAKARIA: Meaning what? Why?

WALLISON: We're going to get up to 2010, and we will still have a very high unemployment, which will be bad for the Democrats and bad for Obama.

KARABELL: I agree with the observation. I do not agree with the causation.

The observation is, this recovery is jobless. And I think there's likely to be a very significant problem for Obama and for the Democrats, because what was promised with the recovery, with the stimulus, was job creation. And that's nowhere to be found.

I don't think the reasons have anything to do with tax policy. I don't think they have anything to do with the dollar. I don't think large companies are not hiring because they're concerned about policy in Washington.

Large companies are doing business globally. There's a global dimension here that I think is new to this era, although people have said, look business is been going global for 200 years. But the way in which it's going global now is relatively...

ZAKARIA: But let's, for this moment, just stick with this. The problem is that the American consumer is not spending. Right?

So, what should Obama do? That's the question.

KARABELL: You know, that's where the stimulus or the spending has to either be directed toward a safety net, which lowers the amount GDP growth and, so, is a problem, or provides the opportunity for longer term job creation. And that's why infrastructure, which was very much on the table, seems not to have been as much on the table, would in my view have been a better idea, but hasn't been part of these packages as much as it could have.

ZAKARIA: Do you buy this?

MICKLETHWAIT: I think it's all to do with owning issues in the end. It's just like Obama is beginning to own Afghanistan. Next year he'll almost certainly own health care. Everything that's wrong in American hospitals anywhere will get blamed on him.

And I think the economy is in the same way. And I think he's stuck in this thing, where you can argue that by putting the stimulus in, he did exactly the right thing.

But the counterfactual -- it's very hard for people to say, well, if you hadn't put the stimulus in, it would have been a lot worse.

Most Americans will be out there with a jobless recovery, with pretty stingy growth by most people's standards, with companies not pushing enough in, with the government still providing a lot of it.

And you are also beginning to see, I think, quite strongly from business -- and in some ways I think this is unfair -- you're beginning to see a degree of suspicion that Obama has drifted to the left, that he's not on their side, that he's not part of the same thing.

And that's the thing which I know the White House is concerned about, but also you hear repeatedly from CEOs. They think that Obama is not necessarily -- he's not turning out the way they expected.

SKIDELSKY: This is an example of what happens when you discuss politics completely segregated from any underlying economic theory.

First of all, a lot of the stimulus isn't going to come from extra government spending. It's going to come from the depreciation of the dollar, and that's been going on. And that will actually produce more exports and, therefore, revive in some way American manufacturing.

Secondly, what does one mean when one says the economy is sliding, or has shrunk by 7 percent? What one means is that Americans are spending about $1 trillion less than they were before.

So, if that's the case, that is why companies don't want to invest, because they don't see the demand. The demand has actually fallen.

Now, in that situation, what a government has to do is to provide an extra source of demand in the economy, and that will then cause the economy to revive.

You can't wait for the banking system to sort of get better and people start lending again, or people start borrowing at the rates of interest they have, unless there's an increase in spending. An increase in demand creates the conditions of confidence.

And then, confidence is a very big factor. If people will always talk about the terrible things that await, the terrible consequences of Obama's policy, then people will begin to feel that there are terrible consequences of Obama's policy.

But you've got to get back to the theory all the time, and then I think the situation isn't nearly as bad as people make out.

ZAKARIA: So, people like you on the right are causing this problem by bad-mouthing...

SKIDELSKY: They're talking down...

(CROSSTALK)

ZAKARIA: They're talking down America ...

WALLISON: We've already seen this happen. And that is to say, when Reagan came into office we had a recession. It was, as I said before, a very serious recession. We had a serious deficit. We had inflation.

Reagan cut taxes, and everyone said -- people said what Lord Skidelsky is saying.

SKIDELSKY: No, no.

WALLISON: And that is that, in fact, we'll get a greater deficit, and we won't have a recovery.

SKIDELSKY: But we had an enormous deficit under Reagan.

WALLISON: But in fact, we had a...

(CROSSTALK)

SKIDELSKY: I mean, how do you think the American economy recovered? There were huge, unprecedented deficits in the Reagan era.

WALLISON: No, it was -- of course, it's the way you interpret it.

KARABELL: Hello. There are facts...

WALLISON: But the deficits in the Reagan era were high. But there was a recovery that came from investment, and not from government spending.

KARABELL: And taxes...

WALLISON: Because he, in fact, cut government spending.

KARABELL: But taxes are also considerably lower. The base today is considerably lower than the base was in 1980.

ZAKARIA: Yes, it's easier to cut taxes when the marginal rate was 72 percent. It's now, what, 38 percent.

WALLISON: Well, actually, the real rate was not 72 percent, because as you remember...

ZAKARIA: Right, right.

WALLISON: ... what happened is that people got deductions for interest on credit cards and things like that. And so the real rate that people were paying was something like 30 percent.

SKIDELSKY: Why is Reagan allowed to run huge deficits, and not Obama?

WALLISON: Because it's how you run the deficits. Reagan didn't run the deficits by spending. He ran the deficits by cutting taxes, so more money was in the private sector. That's what caused the ...

(CROSSTALK)

MICKLETHWAIT: I think what we're beginning to see, what (UNINTELLIGIBLE) knows, is the politics changing, which is what both of you indirectly are referring to. There is going to be an argument in America.

And there's already one -- I think, in this, Britain may be slightly ahead -- whereby the middle ground of politics is going to be more up for grabs.

I mean, people who hitherto have wanted government spending to push this through, there's quite a mix (ph) of middle class votes, certainly in Britain, which has begun to say, you know, where's all this government money going? It's going on far too -- you know, all the public sector is getting far too much money.

You can just see that sort of argument beginning to resonate. And I'm sure the Republicans will push that.

ZAKARIA: But let's follow that. So, what should the Republicans do? I mean, should they be similarly saying, we are going to cut this deficit down, we're going to either balance the budget...

KARABELL: And I think sometimes the problem here is that both sides of this debate -- should we spend more deficit spending, should we cut taxes to put more money in -- none of that actually addresses job creation.

Because, you know, manufacturing could become much more effective in this country. Our exports could go up, and you could still have fewer people working, because the productivity and the technology that allows you to produce more with less is already in place. So, we could export, you know, 5 percent more and still have 5 percent fewer people actually producing those exports.

And health care is now going to be less of a source of job creation, because if some of the cost controls go into health care, that's going to cease a 20-year growth in health care jobs, or at least at the rate of which they're in.

And I don't think either side is dealing with this. But you can be sure that, in the United States, the Democrats are going to be held to the fire, because they are currently the party in power.

I don't believe the Republicans, by the way, have an answer to this, but you can always generate anger.

SKIDELSKY: Look. I feel you're not distinguishing between short run and long run.

Look. There are six million extra unemployed compared to a year ago. Those jobs haven't just disappeared in that period of 12 months because of productivity growth. They have disappeared, because aggregate spending in the American economy fell by a huge amount. If it's restored, those jobs will come back.

In the long run, of course, productivity growth might create a strain in the labor market, and there may be more growth and less jobs. But we're talking of short-run things. We're talking, in fact, the economy is...

ZAKARIA: But how long can the government keep pumping up the -- creating this demand artificially?

SKIDELSKY: Well, the point is that, once the demand is restored, the economy will start growing again...

ZAKARIA: Because that revives the animal spirits of the economy.

SKIDELSKY: It just revives what was going on a year ago. And then, in the longer run, of course, other things change and structural changes happen.

But I don't think you can say, now, that there's bound to be jobless growth as a result of these stimulus policies.

ZAKARIA: So, in a sense, Peter, isn't it fair to say that the two of you actually agree in the sense that the key is to get people spending again, which will get businesses investing again?

WALLISON: Yes, yes. But...

ZAKARIA: Right? I mean, frankly, all this stuff about what Obama says, and whether...

WALLISON: But he taxes...

ZAKARIA: ... he says nice things or bad things -- ultimately, if businesses see that people are spending, they're going to see an opportunity. And whether Obama is being nice to CEOs or not won't matter.

WALLISON: That's right. And that's why he's not going to get any credit for saying all this was Bush's fault. He really has to get the jobs going.

ZAKARIA: The other thing we didn't get to, which is the fact that while things look bleak in the Western world, China will grow at 6 percent, maybe 7 percent this year, India will grow at 6 percent, Indonesia at 5 percent. And that's a very important part of this new economy. And we will have to get to that at another point.

Thank you all. We will be right back.

(COMMERCIAL BREAK)

ZAKARIA: Now for our "What in the World?" segment. What got my attention this week was this new channel on YouTube. It's called Istiqlal Media. Istiqlal means "independence" in Arabic.

What you're watching looks like a lovely travelogue of Afghanistan. And if you spoke Pashto, you would know that the song tells a tale of rebuilding that war-torn nation.

Pretty innocuous, right? Well, it is actually Taliban propaganda.

The enemy in Afghanistan has discovered YouTube. Since they quietly began the channel a few weeks ago, they have posted two videos. The more disturbing clip showing hideous scenes of death and destruction set to music was on YouTube earlier this week, but now comes up as "unavailable."

I guess that's the trouble with trying to post videos of killing your enemy, the Americans, on a Web site that is headquartered in the enemy country, America.

The Taliban had some prior Web experience before YouTube. Shahamat.org is their mouthpiece to the Arabic world. It's got a virtual slideshow of American soldiers' coffins, a ticker news item, and for their English-speaking audiences, they have even translated all of this nonsense.

Their English Web site is not as fancy, but it includes commentary on such things as Obama's Nobel Prize, the recent anniversary of the start of the U.S.-led war against them.

I wondered where this Web site was hosted. It turns out its servers are right here in the U.S., in Portland, Oregon, to be exact.

And all this strikes me as bizarre and totally hypocritical. This is a gang of fundamentalist Islamic warriors who are waging war against the West and modernity, the modern world and all the values that it espouses.

But to make this real, they have to use the fruits of the modern world -- technology, the Internet, YouTube. Of course, they also use modern weapons.

To my mind, this is a sign of the fundamental weakness of groups like the Taliban. Even the Taliban cannot survive without the products of the modern world that it apparently despises.

And we will be right back.

(COMMERCIAL BREAK)

ZAKARIA: We talk a lot about the problems in Afghanistan and Pakistan on this program. And this week, I want to bring in an important perspective on that region and beyond, that of India's.

The world's largest democracy lives right next door to Pakistan and Afghanistan, so this crisis is very much India's crisis as well.

Shashi Tharoor is India's minister of state for external affairs -- in other words, India's minister for foreign affairs -- and he has a long history of dealing with complex global problems at the United Nations, where he served in a number of high-level capacities. He has been a frequent guest on this program, and I wanted to remind you of the last time he was on this program, when I think I was remarkably prescient. Take a look at this.

(BEGIN VIDEO CLIP)

ZAKARIA: Indian elections. You can't tell us. We're all, obviously, hoping that you win and become foreign minister.

(LAUGHTER)

But short of that, short of that prediction, which you can't...

SHASHI THAROOR: Yes, and right down the tubes. You can forget about that.

(END VIDEO CLIP)

ZAKARIA: Shashi Tharoor...

SHASHI THAROOR, FOREIGN MINISTER OF INDIA: Not the only time you've been prescient.

ZAKARIA: But the prophecy came true. So I feel as though, in true Indian fashion, I should now prophecy something else for you that will come true.

THAROOR: Well, I worry about that, because you clearly have the ear of my prime minister.

(LAUGHTER)

ZAKARIA: Let's start with serious things. You see what's going on in Pakistan.

The series of bomb blasts that are taking place, the fact that they are attacking -- these militants, these jihadis -- are attacking the Pakistani state, does this now convince you that the Pakistani state gets it, the Pakistani military gets it? These people are their enemies. The battle is drawn, and the Pakistani military will now take on the fight against jihad.

THAROOR: We certainly hope so, Fareed.

I mean, one of the concerns we've had in recent years is that there appears to have been a tendency in some parts of the Pakistani establishment to think there are good terrorists and bad terrorists. The good terrorists are the guys who go off and bomb Indians, and kill Indians in India. And the bad terrorists are the ones who attack Pakistani interests, whether in Afghanistan or inside Pakistan.

So, in other words, you blow up the Taj Mahal Hotel, you're a good guy. You blow up the Marriott in Islamabad, you're a bad guy.

Now, that sort of distinction -- which I'm not saying is held at the highest levels of government, but certainly has been held in some elements on that side of the border -- that distinction must disappear.

And if what we're seeing now with the assault on Pakistani military headquarters clinches the argument once and for all, then it will be a case, we believe, of Dr. Frankenstein really deciding he has to execute his own monster.

ZAKARIA: Do you think that the Pakistani government has changed in the last three or four months? In other words, has the rise of a civilian, democratic government in Pakistan made an appreciable difference?

THAROOR: What did we ask for after the massacres of Mumbai in 26.11, as we call it in India?

We asked for two things. We asked for credible action to bring the perpetrators of that horror to justice. And we asked for credible action to dismantle the infrastructure of terror from which attacks had repeatedly been launched in India over the last couple of decades.

Now, frankly, we haven't seen enough action on either.

On the perpetrators of 26.11, there are seven people behind bars. It's said they'll be brought to trial. That's fine, but it's not enough.

There are others, including the masterminds, the people who exhorted and incited all of this, such as the founder of Lashkar e- Taiba and Jamaat-ud-Dawa, Hafiz Muhammad Saeed, who is not only running around free to incite hatred and preach mayhem and murder in my country, but has just been released by a Pakistani court after a feeble attempt to prosecute him.

Now, this sort of thing does worry us. We want to see some really clear and firm action.

ZAKARIA: When you say to the Pakistanis, what do they say?

THAROOR: Well, you know, what they say isn't enough, Fareed. They're saying the right things. And I must say that, you know, we have no difficulty talking to the Pakistanis, in the sense that we speak the same language. There's an instinctive level of communication and understanding possible.

But it's what they do that matters.

We have unfortunately had too many examples in the recent past of the right rhetoric -- even the freezing of bank accounts, which they now immediately open up under other names, the banning of organizations which are promptly reinvented under other labels. That sort of -- we've seen that movie before.

What we want now is something new, something clear -- something that shows within Pakistan that it's a clean break from the condoning, at the very least, if not the actual leading, of terrorist actions against India.

ZAKARIA: Let's look at this from the point of view of the Pakistani military.

As I understand their view, to the extent that it is not entirely venal, it is: we can't defeat India militarily in a conventional war. We need to have some military options. And if you these...

THAROOR: But why?

ZAKARIA: If you have these jihadi groups, and they want some assistance, sure we'll give it to them.

THAROOR: But that's sadly been their approach. It's been one of actually using jihadi militants as an instrument of destabilization in both Afghanistan and India. And we think that's wrong.

Let me say one thing very clear to you, Fareed. We actually have a vision of a peaceful subcontinent. India is not interested in being a threat to Pakistan or any other country.

We want good relations with our neighbors. And we actually believe, fundamentally at the strategic level, that a peaceful, stable and prosperous Pakistan is in our interests.

ZAKARIA: But when I then say to General Musharraf, this is what the Indians say, he says, then, why do they have 400,000 troops on the Pakistani border? Why do they have tanks that can only be used against the Pakistani army? Why do they force us to keep 400,000 troops on our border?

THAROOR: Well, it looks like a chicken-and-egg situation, because we would tell you that any attacks that have occurred in India have occurred from that border.

There have been three wars, as you know, declared wars with Pakistan. And there was an undeclared one in Kargil. In every single one of those, the attacks began from the other side, from what is today Pakistan, into India. And therefore, for us not to have a defensive capacity would be irresponsible.

But we have never initiated conflict, and we have certainly never used any of these forces to constitute any sort of threat. They're there in a purely defensive posture.

Don't forget something else. Very bluntly, Pakistan has nothing that India seeks -- except, we would like to see a peaceful Pakistan, because, from our prime minister on down, we really have a vision of the subcontinent as one where the peoples of both countries can actually focus on economic development and on getting on with the future.

Our big priority in foreign policy is actually helping our own country to develop. We have 260 million living below a poverty line that's been drawn just this side of the funeral pyre. We don't want them to have their resources diverted to needless and unproductive conflict.

Our prime minister has repeatedly said to Pakistan, you take one step, we will meet you more than half-way. He said this in our parliament. It takes a lot of political courage to do that when you're talking about a country from which assaults like the Mumbai massacre have been launched against us.

All we're asking is for Pakistan to show us enough good faith, and it will be reciprocated with generosity and conviction on the Indian side.

ZAKARIA: On that note, Shashi Tharoor, a pleasure to have you on, and hope to see you soon again.

THAROOR: Nice to see you, Fareed. Thanks for having me.

ZAKARIA: And we will be right back.

(COMMERCIAL BREAK)

ZAKARIA: Now, to the question of the week.

Last week, I asked you this.

If you were in the White House situation room advising President Obama as he wrestles with the Afghanistan problem, what would you tell him to do: send more troops, stay the course, begin a pullout?

Most of you said, "Get out now."

Holly Holder of Merritt Island, Florida, put it this way.

"Enough is enough. It's a galactic waste of taxpayers money. Foreign powers have been unsuccessful there since the time of Alexander the Great."

Now, for this week's question.

As we've discussed, the Dow hit 10,000 this week. The last time we saw 10,000 was a year ago. So, what of a year from now?

I want to know, are you optimistic or pessimistic? And tell me specifically, where do you think the Dow Jones will be a year from today? I want a numerical prediction.

As always, I want to recommend a book. This one is called "Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It." The author of this book was one of my guests on the program, Zachary Karabell.

The book paints a detailed picture of how this economic relationship between China and America came into being. And Karabell says the marriage has to work; it is too important to both countries, it's too important to the world economy.

The best thing about this book is it's wonderfully written, and it's a great history of the rise of China, the reforms in China, the way they intersect with America and American consumers and American companies. If you like business history and business analysis, this is the book for you.

Also, don't forget. You can follow all things GPS on both Facebook and Twitter. Go to our Web site, cnn.com/gps, to find out how.

Thanks to all of you for being part of my program this week. I will see you next week.

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