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FAREED ZAKARIA GPS

The Third Republican Revolution; Midterm Elections Aftermath; The Disputed Kuril Islands

Aired November 7, 2010 - 10:00   ET

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


FAREED ZAKARIA, CNN 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.

The people have spoken, or at least 42 percent of registered voters have spoken, which is 90 million of America's 300 million people, and the verdict is clear. The Republicans have come to power. But whether they will be able to stay in power will surely depend on whether they're able to fulfill their central campaign promise, which is to cut down big government.

I'm going to lead - leave aside the question of whether cutting government and government spending is the right thing for the economy now. We actually have a great debate on that very topic coming up. But I'm simply holding the Republican Party to its pledge.

The reason I think this will be tough for them to stay politically popular, if they renege on this pledge, is because we've been here before. You see, this is actually the third Republican revolution.

The first was Ronald Reagan's when he came into office in 1980 and promised to cut taxes and cut spending. He did the first bit, enacting a massive reduction in taxes and closed hundreds of loopholes. It was a landmark piece of legislation.

The problem is he never got around to the second part. The result by 1985 was that the federal deficit as a percent of GDP had doubled. It only went down slightly after that because Reagan agreed to several tax increases. But his budget director, David Stockman, argued that the Reagan revolution failed because Congressional Republicans refused to cut spending.

The second revolution was Newt Gingrich's. That was more successful, and Gingrich deserves some credit. Much of the credit, however, must go to the man who was president during those years, Bill Clinton. Clinton's years in office saw the lowest average deficits in decades ending up with a massive surplus, and that is because he both raised taxes and cut spending.

Next up, the Bush years, with Republicans controlling all levers of government after 2002, an ideal time to fulfill the Republican promise, to close the deficit, right? Wrong. It turned out to be the most reckless expansion of government spending in two generations. The two percent budget surplus he inherited from Clinton turned into a two percent deficit. Why? Tax cuts, prescription drugs, and two wars, all unpaid for. The debt exploded.

So, this time, if the Republicans look at the deficit and promise to close it, but then cut taxes and continue to expand spending, the public surely, at some point, will say, fool me three times, shame on me.

Anyway, there's more about this in my "Time" magazine column this week. Check it on the newsstands or at Time.com.

Today, on the show, a great exclusive, Paul Krugman on the message from Tuesday's election. Voters said the economy was issue number one, so what needs to be done to fix it? And what will ever get done given the new balance of power? Krugman's about as pessimistic as they come.

He will be joined by another great economist from the IMF and the University of Chicago Business School - yes, he leans somewhat to the right, Raghuram Rajan.

Then "What in the World?" President Medvedev takes a four-hour tour of a small island and causes a huge diplomatic dustup.

All then, all eyes are on Yemen after last week's attempted cargo bombing. Is there any way to root out terror there? Is Yemen becoming the next Afghanistan? We'll ask Robert Worth of "The New York Times", who has reported extensively from that place.

Then, it's a majority Muslim country, religiously conservative, that has rooted out terror and extremism. How? We'll ask Malaysia's prime minister.

Finally, most Americans probably dreaded setting back the clock today, but did they actually boost GDP in the process? We'll explain in the "Last Look."

Let's get started.

(BEGIN VIDEOTAPE)

ZAKARIA: Paul Krugman wrote before the election that if Republicans took control of even one House of Congress it would be, quote, "terrible," unquote. Well, of course, that's what happened on Tuesday, so how terrible will it be?

"New York Times" columnist, Nobel Prize winner, Princeton professor Paul Krugman joins me now, along with Raghuram Rajan.

Rajan was the chief economist of the IMF, is now a professor at the University of Chicago Booth School of Business, and his last book, "Fault Lines" won the "Financial Times'" Business Book of the Year Award. He and Paul Krugman have sparred in blogs and essays, but I believe this is the first time they will do so in person, if they do indeed spar. Paul Krugman, what is going to be so terrible about the Republicans coming to power?

PAUL KRUGMAN, THE NEW YORK TIMES: Mostly - well, first of all, there's almost likely, almost certain to be extreme clashes. I would put pretty heavy odds on - on at least one government shutdown during the next two years. This is going to be - you know, we're looking back fondly on the statesmanship of Newt Gingrich.

But, beyond that, it means no action. It means that we're probably going to see unemployment benefits, extended unemployment benefits, expire at exactly the moment when that would do the most harm. It means no chance of doing anything, really, to tackle the economy's problems.

So we're basically going to be Hoober -- Herbert Hoover-ing our economic policies at exactly the worst moment for - for the American public.

ZAKARIA: Do you think it's going to be terrible?

RAGHURAM RAJAN, UNIVERSITY OF CHICAGO: I'm going to do a two- handed thing. It could be reasonable if they come together and focus on both expenditure and - and tax reform. Both are needed to put this economy back on the sustainable fiscal situation.

I think gridlock, with 10 percent budget deficits to GDP is a very bad idea. So, if the outcome is gridlock, terrible.

KRUGMAN: But of course it's going to be gridlock. I mean, if you - if you believed that the Republicans and the Democrats can come together, you must have been asleep for the last 20 years.

RAJAN: No, no. It's a hope. I'm not saying it's a likelihood.

KRUGMAN: Yes. Yes.

RAJAN: I think it's a hope.

KRUGMAN: It's a no chance.

RAJAN: It's a hope. If you think there's no chance, I think we have serious problems. Even -

(CROSSTALK)

ZAKARIA: ... it's 10 percent budget deficit, 10 percent unemployment and two percent growth. The status quo is pretty unsustainable, and you're going to get effect of using that as status quo government.

KRUGMAN: Yes. Exactly.

ZAKARIA: You said, in one of your columns a couple of weeks ago, that you thought Obama was going to be blamed unfairly for having moved too far left, and that the more accurate criticism would be that he didn't move left enough.

I have to confess, this - this line of argument puzzles me, because liberals turned out and he got 95 percent of the vote. The big difference was a lot more conservatives turned out, a lot more Republicans turned out, and independents crucially broke and went and voted for Republicans.

KRUGMAN: I wouldn't - I don't think I said that he didn't move left enough. I said that he didn't do enough.

What he did, crucially, was settle for a really inadequate fiscal stimulus, take a relatively light touch on the banks. So he didn't do things that might have produced a better economy.

So, I mean, overwhelmingly, the midterm was public disenchantment because unemployment is still close to 10 percent. He failed to deliver on jobs.

No amount of positioning, you know, appearing, sounding more conservative, whatever, could have changed that fact. What could have changed that fact would have been a stronger economic policy. Maybe he couldn't have gotten it, but that's - the point was they played it safe, saying, well let's not push too hard on economic policy, got a weak economy, and got an electoral disaster.

ZAKARIA: But you - you had exit polls showing people thinking that the government basically had gone too far left. It was doing too many things, they were wording (ph) - voting for conversation Republican candidates. You're saying if they have regulated the banks more, these guys would have, instead of voting for Tea Party candidates, voted for them?

KRUGMAN: People respond - what - whatever people say, what we know overwhelmingly from the political science studies is that it's the state of the economy or, actually, more accurately, the trajectory of the economy, and a year or so before an election that matters.

If the economy had been - you know, if unemployment had been falling, if unemployment had been eight and a half instead of 9.6 and falling, people would have a very, very different view of what was happening.

The notion - I've been thought to be very cynical about this. The notion that people have a set of ideas about ideology, about what - what governments should do, and they'd reward or punish governments based on whether they actually follow that ideology just is completely not true. People may say that, but what they actually do, or how they vote is determined very much by the rate of economic growth in the couple of quarters before an election.

ZAKARIA: So you know that the "Wall Street Journal" editorial page is going to hear this and say, you see, people like Paul Krugman just don't want to hear that the public rejected the Obama agenda.

KRUGMAN: Well, you know, I don't think people like the "Wall Street Journal" admitted in 2008 that the public rejected the Bush agenda either.

What happened was this wasn't (ph) a - an unsuccessful economic policy. I mean, possibly - we can argue that it was successful in avoiding things that are even worse, but you have to deliver. For political purposes, you have to deliver actual improvement, not failure of things to get even worse, and they didn't do that.

And so, it was not an ideological referendum. If you actually ask, voters also thought that Republicans are terrible. They hated both parties, and -

ZAKARIA: But they voted for Republicans.

KRUGMAN: They voted because they were protesting about the state of the country, which was, you know, lousy - lousy employment picture.

ZAKARIA: Would you agree, Raghu, that this is a failed economic policy from your mind (ph)?

RAJAN: I wouldn't say failed. I would say it hasn't done enough on reviving the economy, and I would argue that some of the things that need to be done, places where it has to expend political capital, and I think that it expended far too much political capital on universal health care, which I think we need, but, unfortunately, that took time and energy off the things that need to be done.

One, we've got a banking sector, especially small and medium sized banks, they don't have enough capital. They can't support a recovery when that happens, and the lending that needs to take place.

Two, we've got mortgages, which are heavily under water, which need to be renegotiated. We need to spend political capital in creating a solution to that problem, and, right now, there's no - no will to do that.

And third, I think we've created a lot of uncertainty in health care, in the financial sector with these new regulations. We need to make clear what those regulations will be. Undoubtedly, there's a need for reform, but let's make clear, so that businesses know what they are, can then start going out and hiring.

We've essentially created an overload of uncertainty on those areas of the economy, which are big, important. And - and I think more capital on those and less on - on health care might have been more effective.

ZAKARIA: Uncertainty. Businessmen keep saying that that - it is the uncertainty, that regulatory and tax uncertainty that forced - that causes them not to spend the almost $2 trillion that is on the balance sheets.

KRUGMAN: You really need to be a little careful. Business lobbyists say that uncertainty is the big issue. I actually surveyed businesses and asked what's their problem. They say it's inadequate sales. There - there's no good reason to believe that business investment is being held back because of uncertainty about the health care law, which actually - it's actually fairly clear what that is, or any of these things. What you have is, in a depressed economy, with manufacturing operating not much more than 70 percent to capacity, with office buildings vacant, with malls vacant, why are businesses going to invest more? They already had more capacity than they need.

So this is - this is largely a canard, and just the whole argument about political capital. Lots of people say that, there was a failure to focus on the economy, but they almost never explain what it was that Obama should have been doing, right? And I - I actually view the - the whole focus argument as - as a piece of intellectual cowardice. It's a way to criticize the economic performance without actually saying what you would have done differently.

ZAKARIA: Let's just stick, though, with your main point, which is this is the classic Keynesian argument. You are in - you are in a moment where there is simply insufficient demand in the economy.

Consumers aren't spending, businesses aren't spending. The only entity in the - and the only player in the system that can produce demand is the government, so the government should be spending. What's wrong with that argument?

RAJAN: What should the government do? Can it do it efficiently? Can it do effectively?

We always have in mind large construction projects. We've done that. We've run the gambit of large construction projects which (INAUDIBLE) the bottom of the envelop - of the drawer.

What we do next? It takes time. And it's not probably going to be done in time for the recovery.

ZAKARIA: OK.

RAJAN: So the real question is, what do you spend on?

But this idea that somehow there's a button you can press and somehow the government will create spending, which will certainly revive the economy, I think is a canard, and is probably something that is not - not wise.

ZAKARIA: I've got to interrupt you guys. We are going to take a break. We're going to come right back to have this discussion cum debate. Paul Krugman, Raghuram Rajan, right back.

(END VIDEOTAPE)

(BEGIN VIDEO CLIP)

KRUGMAN: If we get a temporary extension of the high end tax cuts, that - it would be hard to devise a less efficient stimulus policy. This is almost guarantee - this is giving money precisely to the people least likely to spend it, and so it will worsen the federal budget outlook while delivering hardly any punch to the economy.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

ZAKARIA: And we are back with Paul Krugman from "The New York Times" and Princeton University; and Raghuram Rajan from the University of Chicago, but, before that, chief economist of the IMF.

What I want to ask you, Paul, is aren't you going to get some of what you want, which is the Republicans keep talking about tax cuts. Now Keynes actually talked about both, tax cuts and government spending as a way to revive the economy, and if the Republicans give you a bunch of tax cuts, isn't that -

KRUGMAN: OK, now, the trouble with tax cuts is that a temporary tax cut is likely to be saved, not spent. And we know that. That's - that's -

ZAKARIA: We've had three (ph).

KRUGMAN: In fact, that's - that's Milton Friedman. Milton Friedman's theory of - of consumer behavior is that temporary windfalls in income are likely to be saved, not spent.

And now - so can we do permanent tax cuts? Well, have this long- run budget problem. So if you ask, well, what are we going to do that would - that - that would increase demand a lot? Well, we can have big temporary tax cuts, but they're likely to be ineffective, or we can have somewhat smaller, permanent tax cuts, but they're going to worsen the long-run budget outlook.

Add to that the reality that the Republicans - you know, let's be realistic politically - Republicans are not going to say, let's strike a deal to revive the economy. We're going to take some tax cuts that last just a year or two. They're going to try to leverage their position into getting what they want, which is permanently lower taxes, which are then to - going to be used to starve the beast in the out years.

This is not going to work. This is just going to actually worsen.

We - we do have - you know, I'm not one of those people who says that there is no budget problem. There is a longer-run budget problem. Look at the U.S. budget outlook for the year 2025, and it's not a pretty picture.

So we cannot afford to do things that permanently worsen the U.S. budget position. And yet, if we do things on the tax side that are only temporary, they're - it's not going to work, particularly, by the way, if it's tax cuts for the rich, who are the most able to - to smooth out their spending. So, you know, in the end, if - if the Republicans are willing to agree to something that is a - like a temporary payroll tax cut, it's not - it's a pretty poor substitute for actually doing spending on infrastructure, but it may be better than nothing. If they want to do - you know, let's extend the Bush tax cuts indefinitely, that's - that's a policy to do very little in the short run and make the long run worse.

What we're likely to get is some extension of the Bush tax cuts, which, you know what was at stake always was only the high-end tax cuts. And so we - it we get a temporary extension of the high end tax cuts, that's - it would be hard to devise a less efficient stimulus policy.

This is almost guarantee - this is giving money precisely to the people least likely to spend it, and so it will worsen the federal budget outlook while delivering hardly any punch to the economy.

ZAKARIA: I'm guessing that - at least on that issue, you probably agree? That temporary extensions of the Bush tax cuts will not do much?

RAJAN: Probably not. I - I do think that it's a - it's a little problematic raising taxes substantially. But, in the medium term -

ZAKARIA: Now you're talking a Keynesian. You can't have it both ways.

RAJAN: No, no, no. I think we -

ZAKARIA: If raising taxes -

RAJAN: I need - I think we need to do things in the very short run, which deal with some of the problems that Paul is talking about. Too many people are becoming long-term unemployable, and what we need to do is try and move them back into the labor force. We need to focus on those -

ZAKARIA: How do you that fast?

RAJAN: I think you need to focus on skill building. We need - there are programs out there. Many of them don't work. We need to pick ones that work and try work with them.

But I think the real point this crisis is telling us is that America needs to shift. That America, for too long, has seen a deterioration in the underlying fundamentals of the economy, and in an attempt to - to paper over that, we've blown up the economy again and again with monetary policy, perhaps with fiscal policy.

At some point, we have to realize that the fundamentals aren't that good. Too many people are falling behind. Too many people don't have the skills and the education they need to compete in this world.

But, differently, I think the U.S. is a little bit like a car with brakes sort of on, and it - malfunctioning. You sort of get - got to get the brakes to work. But, in the meantime, what we're doing is we're trying to fill the engine with higher and higher octane fuel in an attempt to get it go - to go faster, when in fact the brakes are well and firmly, you know, malfunctioning.

Let's remove those brakes, fix the underlying structural problems, we will go faster.

ZAKARIA: Last word, Paul Krugman.

KRUGMAN: Time is not on our side. The longer this goes on, the more Americans have been unemployed so long that they're no longer employable. We don't have, I believe, a lot of structural unemployment now. But give us two or three more years of this, and we will.

The longer this goes on, the more we head towards a deflationary trap. Look at U.S. inflation rates and Japanese inflation rates from - from 20 years earlier, and we're right on top of the Japanese. We're matching the Japanese track exactly. And more deflation means that the debt burden gets worse.

So we're actually in a situation where there are heavy costs being paid right now. We are not in a recovery in any sense that matters. But, during the years of the bubble, there was a - a great overexpansion of indebtedness by parts of the population, and we cannot have a permanent recovery unless people get a chance to pay that down, and that's - that's what booms do.

Booms - you know, we know that World War II produced an economic recovery. Why didn't the U.S. economy slide back into depression after the war was over? And the answer was that during the war, during the boom, the - the private sector greatly reduced its debt burden. That's what we need to do right now.

But, of course, the point is, given the midterm elections, the next two years, at - at minimum, are awash, and none of this is going to happen.

ZAKARIA: And we're going to have to leave it at that.

Thank you, Paul Krugman, Raghuram Rajan. Right back.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

ZAKARIA: Now for our "What in the World?" segment.

Now, loyal viewers of the show will recall that a few weeks ago I told you that World War I had just officially ended. Well, it turns out that World War II isn't fully over yet either. Two of the combatants are technically still at war with one another, and the cold war between them was ratcheted up this week with a high-level incident.

It all goes back to 1945, when in the aftermath of World War II, the then Soviet Union annexed four Japanese islands. Those islands are part of the Kuril chain, an 800 mile long archipelago that stretches between Japan and Soviet Russia. The Soviets already controlled 52 of the 56 islands, and in 1945 Stalin swiped up the four southernmost islands, and the anger over the annexation meant that a formal peace treaty has never been signed between Japan and Russia.

Since then, attempts at peace have come in fits and starts. In fact, just last month, the Russian Foreign Ministry issued a statement that both Japan and Russia want a peace treaty.

But then, this. On Monday, Russian President Dimitry Medvedev became the first Russian or Soviet leader to set foot on the disputed islands. He spent four hours on the islands, playing tourist, taking pictures, touring a geothermal station and a fish plant. He visited a family home, a church and a food market. Medvedev also reportedly promised the people on the island of Kunashir he would get them more cable TV channels.

But that four-hour tour set off a firestorm. Japan quickly recalled its ambassador to Russia. Before he went there, Medvedev had been warned by the Japanese that such a trip would have, quote, "a grave impact on bilateral relations," unquote. Medvedev's response to those ominous words, I will definitely go there in the near future. And when he did go there, he rubbed his ownership of the islands in Japan's face, posting a picture of the Kunashir coastline on the web, with a caption that read, there are so many beautiful places in Russia - in Russia, get it?

And to make matters worse, Russia's foreign minister responded to the Japanese alarm by saying that the president had enjoyed his visit to the islands so much, he planned to go back.

Meanwhile, Japan is also embroiled in a territorial conflict with this other big neighbor - China. This dispute is over a set of islands in the East China Seas. Due to the ongoing spat, China canceled an official meeting between its premier, Wen Jiabao, and the Japanese prime minister at the East Asian Summit.

Is there a broader point to make about all of these squabbles? Actually, yes. Nationalism lives in Asia.

We sometimes think we're in a world in which countries will be reasonable and rational and make compromises on their narrow national interests for the common good - sometimes. But Asian countries, particularly large Asian countries, remain very traditional nation states, with a strong sense of nationalism.

Each of these countries feels very strongly about its rights to these disputed territories. For instance, 80 percent of Russians say the mother land should hold onto the four Kuril Islands. So Medvedev was certainly playing to the electorate that he will presumably face in 2012. Are the other leaders playing to their hometown crowds as well?

This whole story, however, is also about Asia's new power struggles. China seems the region's obvious power broker, but Russia refuses to be left out of the equation, and Japan has to show it can stand up to the big boys.

The unspoken force in the region is not from the region. It is, of course, the United States.

We will be right back.

(BEGIN VIDEO CLIP)

ROBERT WORTH, THE NEW YORK TIMES: You know, very, very poor governance. You have a state that is running out of oil, a country that is actually running out of water. Sanaa could be one of the first world capitals to run entirely out of water.

All of this makes it incredibly hard to - to make progress against any kind of insurgency.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

ZAKARIA: Is Yemen the next Afghanistan? It's a question that has come up frequently in the wake of last week's attempted cargo bombings.

Yemen is a country in the middle of not one but two civil wars, and now the world is asking it to fight a war on terror. Can it do that, and why is al Qaeda there anyway?

Joining me now, one of "The New York Times'" best reporters, Robert Worth, who has reported extensively on Yemen, and he had a cover story on just this question in "The New York Times" magazine. He joins me now from Beirut, where he's based.

Welcome.

WORTH: Thank you. Good to be here.

ZAKARIA: So why are we hearing about Yemen? What - all of a sudden, we'd heard about al Qaeda in Afghanistan, in Pakistan, in Somalia, now Yemen. Why has it moved to Yemen or why - why has al Qaeda sprouted up in Yemen?

WORTH: Well, al Qaeda has been in Yemen for a long time. I think the reason we're hearing about it is it is now attacking - aiming attacks at the United States.

It's hard to know whether these attack on the U.S. are just a way attract publicity or whether they have in fact decide that that is something that they really care about. As we all know, we've heard a lot about Anwar al-Awlaki, who's an American-born man, who is a preacher, a cleric, very charismatic, who is - appears to be now part of al Qaeda in Yemen.

And there's no question that he has extremely vengeful feelings towards the United States and toward the Yemeni government and many - many people believe that he is part of - he's behind these - this new emphasis on - on the United States.

ZAKARIA: The president of Yemen, effectively a military dictator, President Saleh, is he somebody who is now fully on board this - this battle against al Qaeda? In your "New York Times" magazine article, you - you describe a meeting with American officials who present him with evidence that al Qaeda is - is attacking him personally, and you - you write, then, that seems to have turned things around, and now the Yemeni government is actually taking - taking the fight to al Qaeda.

WORTH: Yes. By all accounts, that's true, and that President Saleh has - has taken this much, much more seriously. There's a lot more American military aid going to Yemen. There are more military advisers there. And they have -

In fact, over the past year, not only have they allowed the United States to do air strikes in Yemen, but the Yemeni military and counterterrorism teams, some of them are very, very disciplined and good. They've been trained by United States and other - and other foreign countries, and they have carried out attacks not just in reaction to - to terror strikes, but sort of independently. They've gone after them, particularly in the past few months.

ZAKARIA: The problem that the government can - deals with in confronting these - in confronting al Qaeda is that it has to extend its reach into - into the country, in places it hasn't - it has to perhaps confront tribes that it has never confronted before. It has always had this kind of more consensual arrangement with it.

This sounds very familiar. It sounds a lot like Afghanistan. And, in fact, you know, the broader question I want to ask you is, it almost seems as though al Qaeda goes into these kind of no man's lands, these ungovernable spaces, with, you know, a lot of local tribal control, perhaps find a few tribes they're accommodating.

And so we're - the - in the United States, always stuck in this position of in order to - to battle al Qaeda, you have to get the central government of this - of this country to extend its reach, its legitimacy and its control in a way that it hasn't for 2,000 years.

Is it possible to do it in Yemen?

WORTH: It's - it's very difficult. It - it's hard to say exactly what the right approach is. And the problem is that as the U.S., you know, gets more militarily involved - again, they're not directly militarily involved, but they've been providing lots more training and they've been encouraging their Yemeni partners to take more - a more active military role.

That runs a terrible risk in Yemen, just as in, as you say, as in Pakistan and Afghanistan, of alienating the local people, who are intensely suspicious of any foreign intervention. And because you inevitably, in areas like that, where intelligence is poor, where the terrain is hard to - hard to reach, and the tribes are powerful, you - you inevitably have some civilian casualties.

One of the American air strikes last year killed quite a number of civilians, and it had a huge, huge effect in terms of protests. And the problem is, of course, that when you already have a secessionist movement in the south and another rebellion in the north, discontent spreads. It's sort of hard to separate one issue from the other.

There is not a broad ideological movement in Yemen the way there is in Afghanistan. There's no Taliban. And that, I think, makes it a little bit easier, in - in a sense.

On the other hand, you have all the other elements. You have your, you know, very, very poor governance. You have a state that is running out of oil, a country that is actually running out of water. Sana'a could be one of the first world capitals to run entirely out of water. All of this makes it incredibly hard to - to make progress against any kind of insurgency.

ZAKARIA: As you know, there's talk here about a drone attack on Anwar al-Awlaki, the American-born preacher who sort of inspired the - the Nigerian Underwear Bomber and perhaps has been playing a - a more broad role in inciting anti-American jihad. What do you think would be the effect if there were a drone attack an Awlaki?

WORTH: I think it would be very unpopular in Yemen. I think Anwar al-Awlaki is mostly viewed as a charismatic preacher, and because he has - isn't known to have actually killed anyone, most Yemenis -

I mean, first of all, he's not that well-known in Yemen. He's better known in the U.S. because of all the - of those - the media coverage of him here. He's becoming better known.

But I think it would be viewed as an attack on a Yemeni, on someone who, you know, isn't necessarily guilty. Yemenis are deeply, deeply skeptical of this kind of thing.

So, I think - but I think it would - killing Awlaki would - would have a lot of negative reaction, and so there are some people who say that the Yemeni government doesn't want him to be found, doesn't want him to be killed because they - they're nervous, understandably, about what would happen then.

ZAKARIA: So, if you were to rate the progress that Yemeni government, with American assistance, is making in de-fanging or defeating al Qaeda in Yemen, al Qaeda in the Arabian Peninsula what would you say?

WORTH: It's difficult to say whether they've made any progress. I mean, they have killed a lot of people, but they do not seem to have killed the group's key leaders.

We have no reason to think that - I mean, we know Anwar al-Awlaki is out there, and he's a - he's a very, very, you know, popular ideologist. We have no reason to think that any of the top leaders are - are dead. And it only takes a few people to - to put together a - you know, a letter bomb, essentially, that could have terrible, you know, global consequences on the economy.

And, clearly, the number of people, the number of Yemeni soldiers and police that have been killed in the past few months suggests that - that al Qaeda, if indeed it's responsible for all those killings, is, if anything, bigger than it was.

So I - I can't say we've made visible progress.

ZAKARIA: Robert Worth, pleasure to have you on.

WORTH: Nice to be here.

(END VIDEOTAPE)

ZAKARIA: When we come back, you've just heard about a Muslim country with a huge terrorism problem. In one moment, a country that is virtually free of terrorism and extremism, and yet a conservative Muslim society.

Is that a model for the Muslim world? We'll tell you in a moment.

(COMMERCIAL BREAK)

CANDY CROWLEY, CNN SENIOR POLITICAL CORRESPONDENT: I'm Candy Crowley and here are today's top stories.

President Obama says Pakistan is not making progress against militants as quickly as the United States would like. The president speaking today at a town hall in India said Pakistan has a lot of potential but also has extremist elements that have to be addressed. President Obama's visit to India is part of a 10-day tour.

In India, the President and First Lady also found time for a bit of fun. The couple took part today in some dance moves during a celebration at Diwali Festival of Lights.

The United States is reportedly deploying predator drones in Yemen to hunt for al Qaeda operatives that according to "The Washington Post." The "Post" also says no missiles have been fired yet.

U.S. Defense Secretary Robert Gates today said he wants the lame duck Congress to repeal the military's ban on gays and lesbians serving openly. He concedes the prospects for Congress acting are unclear. Yesterday, the Commandant of the Marine Corps General James Amos said, now is the wrong time to overturn "Don't Ask, Don't Tell."

And Hurricane Tomas has killed six people in Haiti and left a trail of destroyed homes. The storm is moving away from land into the Atlantic Ocean, but mudslides remain a threat in Haiti, which is still dealing with the effects of a January earthquake.

Those are your top stories. Up next, much more "FAREED ZAKARIA GPS", and then "RELIABLE SOURCES" at the top of the hour. (COMMERCIAL BREAK)

ZAKARIA: We tend to think of conservative Islam as equal to radical Islam or violent Islam. But I'm going to tell you about a Muslim country that is conservative, religious and yet peaceful and democratic. It is dealt so well with terror and extremism within its borders that it is now a model that other nations are trying to follow. The nation is Malaysia.

When Secretary of State Hillary Clinton was in its capital, Kuala Lumpur, this week, she endorsed the Malaysian Prime Minister Najib's call to create an alliance of Muslim moderates worldwide. When the Prime Minister was in New York a few weeks ago, I talked to him about how his war on terror and America's were doing.

(BEGIN VIDEOTAPE)

ZAKARIA: Mr. Prime minister, pleasure to have you on.

NAJIB RAZAK, PRIME MINISTER, MALAYSIA: Thank you.

ZAKARIA: What do you think is the key to defeating the forces of extremism in an Islamic society?

RAZAK: I think there's several reasons why we've been able to overcome those extreme or extremists in our - in our society. First of all, if you look at the genesis of Islam, you know, how it came to our part of the world, it was - Islam was brought by the Muslim traders from the Middle East, and it was a peaceful conversion of the then-Hindu king and the masses became Muslim. So Islam has never really been associated with - with extremism and violence from day one.

Then secondly, you know, over the years, you know, we've been able to bring about development and changes. In the '60s, poverty was more than 50 percent. But now in terms of - of poverty rate in Malaysia, it's 3.6 percent. You know, so you see, you know, the fruits of development actually lifting, you know, the - this tape of socioeconomic status off of the people.

ZAKARIA: So do you think that there is good government, that there's rising standards of living, it makes it less likely that these young boys, they're mostly boy, go into radical movements, go into Jihadi movements?

RAZAK: Yes, with - with one caveat that you do have to ensure the proper teaching of Islam. You know, I keep on saying, being moderate is fundamental to Islam. But once in a while we do have extremists in our midst, whether they are in Malaysia or, you know, they come from neighboring country and we have to deal with it.

And fortunately, our - our security agencies, they're very, very good at this in - in taking preemptive actions, using the Internal Security Act which allows us to detain people without trial, but it's not such a sort of onerous kind of punishment. You know, we detain you, you know, we try to reeducate you, and if you accept that Islam is inherently moderate and you shouldn't resort to violence and extremism, then you're released back to society.

ZAKARIA: As the leader of a - of a Muslim majority country, one very supportive of the United States over the years, do you think that the United States is pursuing the war on terror in the proper way?

RAZAK: Initially, no. I mean, we were quite frank about it. You know, you cannot form extremism into submission. It's about a mixture of the hard and soft power, if you like, of the United States, which eventually would win them more support in a Muslim world than using the military approach.

ZAKARIA: What do you make of this controversy over the building of an Islamic Center and mosque two blocks from Ground Zero? Do you think that this controversy has - has weakens America's image in the Muslim world?

RAZAK: It has because it's - it's a sense of, you know, this phenomena, the so-called Islamophobia is a real concern to the Muslim world. I think Muslim have a sense that they're not so welcome and they feel that is a change in, you know, the attitude of Americans to us Muslim and it's important for us, you know, to get back on track.

ZAKARIA: Prime minister, a pleasure to have you on.

RAZAK: Thank you.

ZAKARIA: Thank you so much.

RAZAK: Thank you.

ZAKARIA: And we will be back.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

ZAKARIA: Our question of the week from the "GPS Challenge" is, President Obama might have had a rough week, but it looks like one American educated president of an African country had a rougher one, dismissing the entire presidential cabinet. Who is it? A, Goodluck Jonathan, B, Joseph Kabila, C, James Monroe, D, Ellen Johnson Sirleaf.

Stay tuned. We'll tell you the correct answer. Make sure you go to CNN.com/GPS for 10 more challenging questions. And while you're there, do not forget to sign up for our weekly podcast. That way you'll never miss a show, and it is free.

This week's book is "The Right Nation" by John Micklethwait and Adrian Wooldridge. Micklethwait is the editor of "The Economist" magazine. I thought it was a very appropriate book for the week because it explores America's shift to the political right over the past half century. The authors are Brits and their outsider's perspective nicely captures the hows and whys of this huge sea change in American politics.

It's wonderfully written, intelligent and accessible. And if you think this country is a center-right nation, you - you should read it. If you don't, see what they have to say.

Now, for "The Last Look". What if I told you that a nation could add billions of dollars to its piggy bank just turning back time? No, I'm not talking about getting into a time machine and cleverly managing to avoid the financial crisis of 2007. I'm talking about what most of you Americans have just done - you've turned back the clock one hour. More than 70 nations do the same thing.

But Japan doesn't. And studies have shown that if Japan started changing its clocks, it would encourage more leisure activity within the extra hour of sun in summertime. And that would mean more time spent in restaurants, bars, on golf courses, and shopping. The studies say Japan could add $15 billion to its GDP and 100,000 jobs to its payrolls just by doing what the rest of the world already does.

So rather than complaining about losing an hour of sleep, maybe the rest of us ought to look on the bright side - go shopping.

For this week's "GPS Challenge" question, we asked you which American educated president of an African country dismissed the entire cabinet? The answer was not Goodluck Jonathan of Nigeria, nor Joseph Kabila of Congo, nor James Monroe, who's actually the fifth president of the United States after Monrovia, the capital of Liberia, was named. The correct answer is Liberia's Harvard educated president, Ellen Johnson Sirleaf, D.

Thanks to all of you for being part of my program this week. I will see you next week. Stay tuned for "RELIABLE SOURCES."