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FAREED ZAKARIA GPS

Interview with James Baker

Aired April 10, 2011 - 10:00   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.

I'll give you may take on the budget mess in just a moment. First, let me tell you about today's show.

We're in the midst of a foreign and fiscal crisis, so can we find a former Secretary of State and Treasury to talk with? Yes, we can. We have a wide-ranging conversation with James Baker, coming up.

Then, "What in the World?" does it take to create a new nation? It's not easy. We'll explain.

Next up, we get a briefing on the economies of the U.S. and the world from one of our favorites, Martin Wolf of "The Financial Times."

Finally, Hollywood decides to dip its toes into international affairs and flip flops.

Now, here's my take. The good news is that Congressman Paul Ryan, the Republican chair of the House Budget Committee, has put out a budget plan for the next year and beyond that tries to tackle America's biggest long-term problem, entitlement spending that is careening out of control.

The bad news is, his plan wouldn't work. But I still applaud him for his courage in taking on the toughest topic and for proposing painful remedies. Any solution to Medicare will involve cuts and they will be unpopular.

So, what's wrong with Ryan's plan? Well, it's an odd proposal from a man who seems genuinely committed to a solution to the U.S. fiscal crisis. The plan does not touch social security. It actually increases defense spending over the next 10 years, then it never actually explains what it will cut from discretionary spending. It simply asserts spending will go down massively.

The bulk of the deficit reduction, which allows for $4 trillion of tax cuts, would come from changing America's health care. Now, there, too, Ryan's plan is simply unrealistic. The theory behind it is that if individuals have to pay for their health care, they will shop carefully and drive down costs. It's a good theory, but in health care, a huge part of the expenses relate to a small percentage of sick patients and to the last year of life, and those two categories overlap.

Eighty-five percent of Medicare's costs are generated by just 25 percent of patients. Now, even in the most conservative health alternatives, the health savings account, people get to buy catastrophic insurance. Well, the sick 25 percent of the patient population would have catastrophic insurance, which would still explode the Medicare budget.

So why do I applaud the Ryan plan? Because it is the first serious effort to begin talking about restructuring entitlements, which is a necessity. Democrats can attack the plan but they, too, must face up to the fiscal reality and come up with their own plans.

The Government Accountability Office concludes that America faces a fiscal gap of $99.4 trillion over the next 75 years. Now, that would mean we would have to increase taxes on average by 50 percent or reduce spending by 35 percent simply to stop accumulating more debt than we already have.

Medicare, Medicaid and social security will together make up 50 percent of the federal budget by 2021, in 10 years. For liberals, this long-term fiscal crisis should seem devastating. If entitlement programs continue to grow, they will soon crowd out almost all other government spending. This means there will be little money left for programs to address poverty, income inequality, education, infrastructure, science and technology, research and all the other purposes of active energetic government.

"The Washington Post" blogger Ezra Klein has pointed out that the federal government is turning into an insurance company with an army, and if that insurance company doesn't shrink, soon there wouldn't be much money even to pay for an army.

You can read more of my thoughts on this subject in this week's "Time" magazine and on Time.com. Time has a great cover on Abraham Lincoln and the Civil War.

Let's get started.

(BEGIN VIDEOTAPE)

ZAKARIA: Joining me now, the former Undersecretary of Commerce, Secretary of the Treasury, Chief of Staff of the White House, Secretary of State James Baker. Welcome to the show.

JAMES BAKER, FORMER SECRETARY OF STATE: Thank you, Fareed.

ZAKARIA: Let's start with the last post first, Secretary of State. You watch what's going on in Libya. How is the Obama administration handling Libya?

BAKER: Well, I think that so far, at least, I could support the idea of a limited use of military power to prevent a humanitarian nightmare in Libya. But, more generally, I think we're experiencing truly momentous events across that whole arc, that whole region. And, generally speaking, I think we need to be -- to be clear that we're going to always support our principles and values, that is the promotion of democracy and the protection of human rights, politically, diplomatically and economically, but when it comes to the use of military power, we need to find a national interest because you have to maintain the support of the American people. In a democracy such as ours, the final arbiter of foreign policy is the will of the American people. If you don't have a national interest, sooner or later you will lose the support of the American people and the body bags start coming home.

Now, this is a limited --

ZAKARIA: Do we have -- do we have a national interest in Libya?

BAKER: No, no. But that's why I said this is an exception to what I think the rule should be, and it's an exception because the -- the use of our military power here is quite limited. The president has made sure that it is circumscribed, and, therefore, I think it's probably an OK use.

Had I been in there in the Councils of Government, I'm not sure I would have supported it, but I understand it. And as long as we don't see mission creep, as long as we don't escalate our role, I'm not sure that saying that Gadhafi must go, regime change, advocating regime change, was the right thing to do because that's going to put a lot of pressure on the administration to escalate its -- its role in Libya.

But I think, as a general rule, this is an appropriate exception to the idea that you really ought not to use military force unless you have a substantial natural (ph) -- national interest at stake.

ZAKARIA: If we are going to be careful not to ratchet up military means, do we need to start moving down -- ratcheting down this goal of regime change?

BAKER: Well, it is -- it's not a military goal of ours, as I understand it. The administration says it's not a military goal. It's our political goal.

Well, the U.N. Security Council resolution says protect civilians. You know, these things have unintended consequences. What about the civilians now, not Gadhafi supporters, military people (INAUDIBLE) or governmental people, but civilians who happen to support Gadhafi? And there are some -- plenty of those in -- in Western Libya.

What about the rebels' atrocities against those civilians? And there are going to be some. It's a civil war. We've injected ourselves into a civil war. How are we going to protect those civilians?

ZAKARIA: How will you get out of the stalemate in Libya if the west stays under Gadhafi's control and the east stays under the rebel's control? BAKER: I'm not sure that you will. How did we get out of it in -- in Korea? We didn't. How did we get -- of course, that wasn't indigenous upright (ph), but we had a -- and we still have a divided Korea, you know?

ZAKARIA: You think we could end up with a divided --

BAKER: We have a stalemate.

Well, Korea was a stalemate. Vietnam was a stalemate. Some would argue to you that Iraq, on -- the second -- I would not make that argument, but some would argue that that was a stalemate. I don't think it -- I don't think it was or is. I think we will ultimately be successful in Iraq.

But if you end up with a stalemate, then you ask yourself, OK, we've protected the citizens of -- the civilians of the eastern part of -- of Libya. Are we better off with two states there or not?

I can't answer that question. I don't -- I don't know.

ZAKARIA: Maybe --

BAKER: Anything is probably better than Gadhafi. I would say that. And that's why I say this was, in my view at least, an acceptable exception to the rule that normally you wouldn't use military force if you don't have a substantial national interest at stake.

ZAKARIA: And we're going to take a break. When we come back, more with James Baker on the rest of the Middle East, rest of American foreign policy.

(END VIDEOTAPE)

(BEGIN VIDEO CLIP)

BAKER: If we lost secure access to the energy reserves of the Arabian Gulf, we would be in big trouble in this country, and in the west generally. So we have a huge national interest at stake there and we must be very careful not to take action that would jeopardize that.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

ZAKARIA: You were just in the Middle East. You were in Saudi Arabia. The Saudis seem rattled by not just the events in the region but by our response.

BAKER: That's right. I think they -- I think they are, and I think it's understandable. I believe that they felt that we were too quick to pull the plug on Hosni Mubarak, who'd been an ally of the United States for 30 years. He'd sent his troops to fight alongside ours in the first Gulf War.

Was he authoritarian and with maybe minimal due regard for human rights and so forth? Yes. He did not share our principles and values. I think the Saudis believed that it would have been better to just let the Egyptians see the end of that regime, that he had said he was going to step down in September. It would have been better from the standpoint of stability, and what follows, to let that process take -- take its course in Egypt.

We don't know what's going to follow. We read today that the Muslim Brotherhood is getting stronger. They were the only other organized force other than Mubarak's political party. And so we don't know, when -- when these -- when these things happen, we -- we need to do everything we can to make sure that there's an acceptable result after, there's an acceptable succession, if you will.

ZAKARIA: When we look at the -- at the Middle East, the -- the most important country, the 800-pound gorilla from our point of view.

BAKER: Yes, Saudi Arabia.

ZAKARIA: Is Saudi Arabia. So if you were to see protests begin in Saudi Arabia --

BAKER: You've seen them.

ZAKARIA: -- and if they were to continue, what would you advise the president of the United States to do at that point?

BAKER: Well, I -- I subscribe to the idea that in formulating and implementing our foreign policy we should adopt an approach of pragmatic idealism, that is we never walk away from our principles and values, support for democracy and human rights. But that cannot be the end all-be all of our foreign policy. That cannot be the only thing.

Here, in -- in the case of Saudi Arabia, we have a huge national interest at stake. If we lost secure access to the energy reserves of the Arabian Gulf, we would be in big trouble in this country and in the West generally. I mean, you talk about our economy being in -- in trouble in terms of job creation. If -- if something happened to our access to those energy reserves, we'd see some real chaos in our -- in our economy. So we have a huge national interest at stake there and we must be very careful not to take action that would jeopardize that.

So what do we do? Well, we, again, support the idea of more pluralism, a more transparent political system there. We support it politically, diplomatically, economically. But we're -- we should be very careful about getting into the idea that somehow we're going to use military means to effect change in that very, very important part of the world.

ZAKARIA: Let's get specific. If there are widespread protests, the Saudi government will look to the United States to back it and to not back the protests.

BAKER: It will -- it -- that's right. But, you know --

ZAKARIA: Should we -- should we support the government in that situation?

BAKER: We should -- well, militarily? Probably not going -- we should probably not go in there militarily. I -- I think that would be a -- a terrible mistake.

ZAKARIA: But, politically (INAUDIBLE) --

BAKER: Well, politically, diplomatically, economically, we should support our principles and values and we can do that. In fact, we -- we quite often do with our friends, the Saudis. And, make no mistake about it, they've been our friends now ever since Franklin Roosevelt met with -- met with King Ibn Saud on the -- on the U.S. warship, and -- way back in the early 1940s. And -- and you don't just walk away from allies like that.

Militarily, do we encourage them to -- to open up, become more transparent, reform? Yes, we do. King Abdullah has shown some signs of, in fact, doing that, but that -- that's a far cry from -- from our getting in there militarily.

Each country is different, though. That's another thing that I think we need to keep in mind. These countries -- these countries and what's happening in these countries is not all exactly the same. That's why our response in Tunisia or Egypt might be different, for instance, from our response in Libya.

I mean, if there was ever a case of a -- of a bad guy, it's the -- it's the one we have confronted for years in Libya. So it was a little bit easier there to make a limited exception to the idea that you don't use military force unless you have a national interest at stake.

Generally, though, that's a sound idea because the American people have to support the policy. If you don't have a national interest, you will ultimately lose the support of the American people if the policy -- if the event carries on for too long.

ZAKARIA: Take a look at a place that many Americans increasingly feel we do not have a national interest, and that is Afghanistan. There is now --

BAKER: Yes. Yes.

ZAKARIA: -- almost 60 percent of the American people consistently feel we should draw down or get out. What do you think?

BAKER: Well, I'm -- I'm coming more and more around to the view that it -- that it's time to take a close look at our involvement there. We've got 110,000 Americans there or something like that. Our own CIA has said there are 125 al Qaeda in Afghanistan. Seems to be a little bit disparate numbers.

I mean, why do we have to be in there, doing the work for all countries that surround Afghanistan that have every bit as big an interest as we do in a stable Afghanistan? Why don't we pull together a conference of China, India, Pakistan, Russia, Iran -- Iran helped us when we first went into Afghanistan -- and the United States and say, hey, look, you guys have every bit as much of an interest in a stable Afghanistan as we do, and yet we're doing all the work and -- and bearing all the cost and the sacrifice in -- in blood and treasure. You need to get in here and help us. We might get some help.

But we need to take a long -- a close look at whether that is still a vital national interest of the United States. I would argue to you that Yemen, which is coming apart too, is -- may end up being more of a problem as a failed state for al Qaeda than Afghanistan.

ZAKARIA: Do you think when you -- when you talk about Yemen, that's another one of these dilemmas?

BAKER: (INAUDIBLE).

ZAKARIA: Should the United States be trying to push the president out or should it be trying to support the president?

BAKER: The only way I -- the only way I can answer that question is to ask you what you think the succession would be, and we don't know. And they're -- they've got to make a calculus there in the White House as to whether or not easing him out, try to find a way to ease him out and bring someone in who may be able to respond better to the aspirations of the -- the Yemeni people would make sense.

But -- but we have to be very careful that we're not seen to be -- this guy also has helped us in the war on terror, significant. We can't be seen to be abruptly yanking the rug out from under people who've been our allies for many years because other people in the region see that and they say, wait a minute, are we next? So you have to be very careful about that.

That's a very tough problem. But it's a tough problem in all of these countries. What do you do in Bahrain? What do you do in Algeria? What do you do in -- in Morocco? In Syria? In Yemen?

So each country should stand on its own two feet and -- and, again, I liked the formula that I've just suggested to you that we have a policy of pragmatic idealism. We don't walk away from our principles and values but we also are very aware of what our national interests are in each of these places.

ZAKARIA: And ultimately the -- the national interest in the Middle East is what you described it as when you were Secretary of State, rounding up public support for the Gulf War, right?

BAKER: Well --

ZAKARIA: Which is jobs, jobs, jobs.

BAKER: Well, that's the public -- that's the national interest insofar as let's say Saudi Arabia's concern for sure. And -- and that's not an inappropriate national interest. In fact, given our financial situation today, it's a very good national interest, and our economic situation, and (INAUDIBLE) one of the number one -- the number one goals of the administration, create more jobs. So --

ZAKARIA: And that means maintain stability in the -- in the Arabian government?

BAKER: It does. It absolutely means maintain stability in the -- in the Arabian government.

There's nothing wrong with stability either as a goal of foreign policy. Stability can be good -- not at the expense of human rights, not at the expense of -- of inhumane oppression of people, but stability is a reasonable foreign policy goal and it's in our national interest to see a stable Gulf.

ZAKARIA: We will come back. We'll be back with James Baker and we're going to talk about the Republicans, President Obama and the budget.

(END VIDEOTAPE)

(BEGIN VIDEO CLIP)

BAKER: The United States of America, if we didn't have the dollar as the de facto reserve currency of the world, we'd be Greece. I mean, we are broke, bankrupt. Really bankrupt.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

ZAKARIA: And we are back with James Baker, who was Ronald Reagan's Chief of Staff, Secretary of the Treasury; and George H.W. Bush's Secretary of State.

When you watch what's going on in Washington, the partisan divide seems as great as ever, the inability to work together seems great. Sometimes they manage a deal, sometimes they don't. But there's an enormous amount of partisan wrangling. Is there a way out of this?

BAKER: Well, I think ultimately there will be a way out of it, yes. It's too bad, the -- our politics has gotten quite ugly up there since I was there.

In those days, when I was up there with Ford, Reagan and Bush one, you could reach across the aisle and you could be a political adversary but you didn't have to be a political enemy. Today, too much has led -- it's a zero -- zero sum game, and that's really regrettable and unfortunate. There are a number of causes for it that we don't need to go into here, I suppose, but it's -- it's too bad because we used to be able to do the people's business, and it's getting harder and harder to do that. But then you got the -- the 2012 budget. That's the big enchilada, and you have the debt limit coming up. And when I was Treasury Secretary, we -- you know, we had to work, work, work, work, work, even way back then, 25 years ago, to make sure that we could get the debt limit raised so the government could keep functioning and -- and we could keep honoring our debts to people and wouldn't have to default.

Both of those are coming up, and those are going to -- those are going to make this battle look like nothing.

ZAKARIA: And what do you think the Republicans should do on the debt limit?

BAKER: Well, it -- at some point, we've got to get a handle on this spending binge we're on. The United States of America, if we didn't have the dollar as the de facto reserve currency of the world, we'd be Greece. I mean, we are broke, bankrupt. Really bankrupt.

We're going to have debt to GDP over the next five years of over 100 percent. That is not sustainable. Now, you've got to take care of that.

How do you take care of that? You've got to do it by cutting spending, with respect to which there is no political will on the part of either party -- not just a Democratic problem but also a Republican problem. Primarily a Democratic problem, I need to say. Or raising -- and/or raising revenues.

You need to do both. Both have to be on the table. But we got to get a handle on that.

And -- and one way to -- to bring a lot of attention to the problem is to not keep increasing, keep getting ourselves a new credit card every time we run out of money. That's one -- one real way to -- to --

ZAKARIA: But you were Secretary of the Treasury.

BAKER: Yes.

ZAKARIA: And Tim Geithner says to not raise the debt ceiling would send the signal that we're a Banana Republic.

BAKER: It will send a signal that we're -- well, that's what I used to argue. And I believe that.

But, at some point, we've got to stop this profligate spending spree we're on. We are in big, big trouble.

The biggest challenge facing the United States today is not what's happening in the Arab world. It's not what's happening with respect to Iran's search for a nuclear weapon or anything else. It's not our wars in Iraq and Afghanistan. It's our debt bomb.

We are broke. You cannot be -- you cannot be powerful militarily, diplomatically or politically unless you're powerful economically.

The source of America's strength has been its economy and -- and our economy now is in the tank, and -- and it's just not acceptable. We have got to find a way to deal with this, the number one problem facing the country.

That's why I, frankly, was disappointed that -- that the Obama administration didn't come with a budget proposal that dealt with this continuing growth of entitlement. We've got to deal with that. Somehow we have to find the political will to deal with that.

ZAKARIA: Do you think President Obama has been -- has led enough on this issue?

BAKER: I would like to have seen him be -- be more forceful in -- in saying yes, we're going to take care -- we're going to confront these problems. I would have liked to have seen that.

ZAKARIA: You -- you --

BAKER: Let me tell you -- let me tell you a couple of things I think could be done that don't solve the debt bomb. One would be to do tax reform.

I was down yesterday in Washington before the Joint Committee on Taxation. Chairman Max Baucus and Senate -- then (ph) Chairman David Camp on Ways and Means, Senate Financial Ways and Means. And -- and I said, you know, the -- the stars are aligned just like they were in -- when Ronald Reagan last reformed the tax code, 25 years ago, in 1986.

That tax code has now grown again into an abomination. The America people hate it. It's too complicated. They can't understand it. You have to pay lawyers and accountants a lot of money.

We need to simplify it. We need to lower marginal rates and eliminate preferences and deductions. And frank -- and fortunately, today, we have two chairman of the tax writing committees in the Congress who would like to see that happen. It's not going to happen without presidential leadership.

ZAKARIA: You ran two presidential campaigns. You look at the Republican field right now, whose campaign would you want to run?

BAKER: I can't -- I'm not into that anymore. I don't do that. But I think we've got a lot of good candidates out there. I think I've seen enough of these cycles to know that a -- a contested primary is good for the ultimate nominee of the party out of power. It's very good to have the contest out there.

We've got a lot of good candidates. We have many, many good governors out there. Former governors, governors, and -- and other candidates. And a lot is going to depend on -- on what we do or don't do with respect to this -- to this debt issue. And I -- and I think maybe the president is thinking, well, we'll let the Republicans promote these ideas and that will cost them politically, because they're controversial. You know, it's like taking on Medicare is a controversial issue. And maybe we'll just sit back and criticize what they're doing.

Now, I understand the politics of that and it may be smart politics, but I don't think it's going to be, because I think the American people understand that we need to deal with all this spending and all this debt or we can no longer remain a powerful nation.

ZAKARIA: What do you make of the Tea Party?

BAKER: I think the Tea Party is -- helps the Republican Party. I've said that before. People ask me what I think Ronald Reagan would think of the Tea Party. And I think he would be very, very comfortable with the Tea Party. I said, in fact, that I think he might be leading it. He was very, you know, he was seen to be somewhat revolutionary in his day.

And I think that it gives us energy. It gives the Republican Party energy. They vote Republican. If they were to split off and become a third party, that would be very bad for the Republican Party, but that's not where they are. They vote within the Republican Party. They work within the Republican Party. I think they're an advantage as far as the Republican Party is concerned.

Of course, that judgment may be subject to change depending on what happened. But that's what I think right now, and I believe it's correct.

ZAKARIA: If one were to look at the candidates, would it be fair to assume that the kind of candidates you would like would be the Mitt Romneys, the Tim Pawlentys, who are not the Tea Party candidates? This would be more the establishment Republicans --

BAKER: Nice try. Nice try. You're not going to get me into the Republican Primary situation yet. I mean, maybe later. Maybe next time I come back.

ZAKARIA: All right. We'll keep it for the next time.

BAKER: Yes.

ZAKARIA: James Baker, a pleasure to have you on.

BAKER: Thank you, Fareed.

ZAKARIA: And we will be back.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

ZAKARIA: Time now for the part of the show we call "What in the World?" Regular watchers of this show will know that 2011 will see the creation of a new state, the Republic of South Sudan. Nearly 99 percent of the people of South Sudan voted to secede from the North of the country. Now, the focus is on creating a state. So how do you do it? What do you need? Well, for starters, you need a song that unites people. Something like this -

(AMERICAN NATIONAL ANTHEM IS BEING SUNG)

ZAKARIA: Or this --

(BRITISH NATIONAL ANTHEM IS BEING SUNG)

ZAKARIA: Here's what South Sudan chose for their national anthem. The proposed name, "South Sudan Oyee." In an "American Idol"-style competition at Juba University, teams tried out various tunes with soaring rhetoric and crescendos to match. There were joyous, emotional scenes. OK. But a lot more needs to be done.

All kinds of small arrangements you wouldn't have thought of. Here in the U.S., we quite conveniently have an international dial code that is Plus One. What will South Sudan get? The economist suggested it could be the number 292. A decision that will eventually be made by a group with the fancy name of International Telecommunication Union headquartered in Geneva, of course.

What about a country code? Again to Geneva, the International Organization for Standardization there will give a two or three-letter code to any new country. On their website, Sudan has SD. Last time we checked, SS is still free. They better hurry.

South Sudan will also need embassies in London, Washington and more. But first, it needs those countries to formally recognize it as a state. In some cases that could take years.

What about money? A new country needs a new currency. Well, the existing Bank of Southern Sudan is expected to kick start things by designing and printing new notes. They'll also have to create an exchange rate, make interest rate decisions, protect against counterfeit bank notes and so on.

Then there's oil. Most of it is in the South, but the North has all of the infrastructure. So the two sides will have to work it out.

Around the world, encyclopedias will be edited, textbooks rewritten, maps redrawn, which brings us to this. Another image that made us think "What in the World?" The new government is planning to re-create its provincial capitals in the shape of animals. Juba, the national capital, would assume the form of a rhino. The second city, Wau, is to be rebuilt in the mold of a giraffe. I'm not making this up.

Now, it's fun to take a tongue in cheek look at the plans of a nation that's long coveted independence. But let's not forget, this is a serious story. Please keep an eye on Sudan and on the new Republic of South Sudan. Their people have been neglected by the world before and with dire consequences. That shouldn't happen again.

Stay with us. We'll be right back. (END VIDEOTAPE)

(BEGIN VIDEO CLIP)

MARTIN WOLF, CHIEF ECONOMICS COMMENTATOR, FINANCIAL TIMES: It's the only big developed country whose economy is actually now bigger than before the crisis. It's actually had a really remarkably successful transition through this crisis in terms of GDP.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

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

In his first statement since leaving power in February, former Egyptian President Hosni Mubarak said accusations of corruption against him and his family are unfounded. In a radio address to Egyptian people, Mubarak said the allegations were, quote, "aimed to taint my reputation and to undermine my history." Mubarak said he will cooperate with any investigations because he has nothing to hide.

And Israeli Prime Minister Benjamin Netanyahu vows his country will strike back against continued Palestinian attacks. Meanwhile, Israeli Defense Minister Ehud Barak said the Israel will stop firing on Gaza when they stop the rocket and mortar attacks into Southern Israel.

Thursday, Israel responded to a Hamas rocket attacks with a series of strikes on Gaza that left at least 18 people dead.

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

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

ZAKARIA: Welcome back to GPS.

All of the turmoil in the world, the revolutions in the Arab world, the Japanese disaster, the U.S. budget fight have real economic consequences.

To talk about economics, let's turn to one of the world's influential writers on these matters, Martin Wolf joins me. He's the Chief Economics Commentator at "The Financial Times."

Martin, first, what is the American economy look like? There was some relative good news with regard to jobs. Do you think this means we're in for a more traditional recovery now?

WOLF: I think the answer is that it's looking actually quite good. Over the next year or two or three, there was a real nervousness at the middle of last year. And you'll remember this, some real doubts.

I think that the economy is now expanding. And the jobs figures are coming out well. That's sort -- sort of building on itself. The corporate sector outside the financial sector is cash rich. It is -- it is in good position to spend more. Investment ought to rise. Investment in residential housing has collapsed, but it's now already, as it were, so low, it can't fall further. There also seems to be some buoyancy in the household sector.

So it does seem to be now that it's not a dramatic recovery by American standards. We used to expect the American economy to bounce back with six percent growth or so. We're not going to see that. There are still a lot of burdens, but it now is beginning to look quite well.

And remember, it's the only big developed country whose economy is actually now bigger than before the crisis. It has actually had a really remarkably successful transition through this crisis in terms of GDP. Now they want the jobs.

ZAKARIA: Now, before we get to that, the big debate in the United States is, how much to cut and how much to balance the budget and whether that will produce economic growth. And you're living in a country that just did a dry run on this.

So the British case, you could argue, that maybe there were more -- there was a greater urgency because they didn't need to borrow and they don't have a reserve currency. But, whatever, the British decided, we're going to cut the budget and this is going to grow the economy. What are the results?

WOLF: In my view, they should be cutting taxes. They should be willing to cut the taxes to support the economy during the transition, just focusing on reducing the spending. But evidence on the British case at the moment looks very doubtful, very worried.

In the U.S. case, I've never seen the immediate budgetary position. That's a problem. The U.S. can borrow in current circumstances very easily and will be able to do so for some years. It's the medium to long-term fiscal problems, the problems over the next 10, 20, 30 years that have to be addressed.

The immediate situation for the U.S. is an inevitable consequence of a massive financial crisis that there would be this huge fiscal deficit. I forecast even before the crisis happened that that would be a consequence. And I think the U.S. should be relatively relaxed about the short term and very much more concerned about the medium to long term.

ZAKARIA: Medium to long term, the Ryan budget plan, does it -- does it solve the medium to long term?

WOLF: Well, if you believe in any of the figures. And I've actually spent some time looking at it very, very carefully and it seems to me to be -- I don't know, sort of political fantasy. There are two elements of the plan. Everybody's focused quite rightly, because it's the one concrete proposal on the plans for medical care, which involve a completely radical deconstruction of the Medicare system. It's shifting the risk on to -- on to private people and I'm sure that it would have very adverse consequences for those people. You've written about that.

But it does say, essentially, we now are spending about 5.5 percent of GDP on these plans. The Congressional Budget Office says 40 years from now it will be 12.5 percent, and I'm offering you less than five. But that's very radical.

But the really radical bit of this plan is somewhere else, which people haven't -- don't seem to me to have noticed. And it's not revenue, but it's quite optimistic. I think you've noted that, too.

But if you look at non-health care, non-social security and non- interest spending, at the moment, so this is the Defense Department, Health, not -- Defense Department, Education, the parks, virtually everything, that's 12 percent of GDP now -- 12 percent of GDP. And he's forecasting, according to the CPO, that 40 years from now, this will be 3.5 percent of GDP.

So the Defense Department will disappear, the government will disappear -

ZAKARIA: And never -- never detailing how this will happen.

WOLF: The idea that over the next -- this would essentially mean reversing 100 years of growth of the federal government. Now, you can only say this is a revolutionary proposal. It would mean the U.S. going back to the sort of country it was in 1900.

Now, maybe that's possible. I find it very difficult to believe. I'm not an American citizen. It wouldn't be possible anywhere else. But surely that's what really revolutionary. Then Defense Department would disappear.

The Americans, it amounts to a statement that we would no longer be a first-ranked military power with China rising. I think -- it seems to me to be honestly, complete fantasy land.

The conclusion I draw from this, it would may be a very painful one, if the U.S. wants its budget, it's going to raise taxes. They may not like it, but they will end up by raising taxes.

ZAKARIA: Portugal has now asked for a bailout. Is this the straw that will break the camel's back or is the Euro zone now -- now in good shape to deal with this?

WOLF: It was completely predictable and predicted -- everybody expected it. So the three most vulnerable countries have got the hope, and there's some evidence to support it is that this is the (INAUDIBLE). They will take these countries out of the market. So it's Ireland, Greece and Portugal out of the market. They will be financed by the Euro countries as a whole. They're very small, so it's easy to do so. So they wouldn't do anything about resolving the debt, restructuring the debt.

And the key point, the crucial issue is it doesn't spread to Spain. As long as -- and so far, it looks as though it might not. It's not certain. If it doesn't spread to Spain, the Spanish can resolve their banking crisis, can maintain the access to the markets to finance the government. The Spanish economy perhaps begins to grow, though it's far from being robust at all. And Italy looks all right, too. The system will survive.

ZAKARIA: When I look at the -- the global economy over the last month or two, you see oil sharks because of the Middle East crisis. You see the price of food has already gone up considerably. You see Japan almost taken out of the global economic system for a little bit and now on a sub -- on a lower growth trajectory than it was.

Is all this materially going to affect global growth?

WOLF: One of the things that surprised me when I was in Washington, I was talking to people who said they remain very confident. From what this comes down to in essence is what they're saying is the U.S. recovery is going to continue. China, India, the other, the crucial players are going to continue to expand vigorously. Germany looks fine, so the core of the Euro Zone looks fine.

Borrowing a monstrous -- obviously, if we're talking about oil prices at $150 or $175 a barrel, we're in a different world. But they're basically saying this is going to carry us through, unless there is an extraordinarily big additional shock.

In some way the rise in oil prices, though, it's not all of it, is a consequence of the recovery of the world economy. The last bit is clearly related to turmoil in the Arab world, but most of it is simply because demand is growing.

So I've been quite impressed by how optimistic the mood among those officials I talked to in Washington is about as it were the big picture for the world economy. I hadn't felt that sort of optimism really for some time.

ZAKARIA: On an optimistic note, we should end.

Martin Wolf, pleasure to have you on. Come and visit us the next time you're in New York.

WOLF: Great pleasure.

ZAKARIA: And we will be back.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

ZAKARIA: A question this week from the "GPS Challenge" is how did Moammar Gadhafi address President Obama in a letter this week? Was it, A) "To our son, His Excellency"; B) "To your Most Honorable Sir"; C) "To my Brother-in-Arms"; D) "To my fellow African"?

Stay tuned. We'll tell you the correct answer. Make sure you go to CNN.com/GPS for 10 more questions. And while you're there, make sure you check out our website, the Global Public Square, where you'll find smart takes, including mine on world affairs, the economy and much more.

Now, for our "Book of the Week," no foreign policy terms this time. I read a novel over spring break and I wanted to share it with you. It's really great. "The Imperfectionists" by Tom Rachman. It's a debut novel by a young novelist, a series of interlinked short stories about a group of journalists at an English newspaper in Rome. Brilliantly told. A smart page turner. But a warning, if you are an aspiring journalist, this book might change your mind.

Now, for "The Last Look." Do you remember "Red Dawn"? It was a cult classic movie that came out in the mid-1980s when I was in college. If somehow you missed it, it concerned a Soviet invasion of America's homeland successfully fought off by a ragtag band of Colorado high school kids.

Well, the movie was apparently so good that it has -- it is being remade. Since the Soviets are today the Russians are no longer much of a threat, the filmmakers had to find a new bogey man. So as you can see from the still shots on the set in Detroit, the invaders are now Chinese. But after filming, things blew up a little.

The "L.A. Times" reports that MGM became so scared of offending Chinese investors and audiences that all the Chinese flags and logos in the film are now being digitally re-altered so that America's new silver screen enemy will be none other than North Korea. You see, there are no real worries about North Korean investment funds withdrawing money.

The correct answer to our "GPS Challenge Question" was "A," Gadhafi addressed President Obama as, "To our son, his Excellency, Barack Hussein Obama". Go to our website for more questions and answers.

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