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JOHN KING, USA

Market Plunges; Avoiding Default

Aired August 2, 2011 - 19:00   ET

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


JOHN KING, HOST: Thanks Wolf and good evening tonight from the White House. In addition to death and taxes, these two things also certain tonight, the government will not default on its obligations when the clock strikes midnight, and the acrimonious debate over taxes, spending and the role of government will continue, despite President Obama's signature today on a major debt ceiling and spending compromise.

(BEGIN VIDEO CLIP)

BARACK OBAMA (D-IL), PRESIDENT OF THE UNITED STATES: Everyone's going to have to chip in. It's only fair. That's the principle I'll be fighting for during the next phase of this process.

(END VIDEO CLIP)

KING: That's the president's way of saying he will fight for tax increases as the deficit spending debate enters its next chapter. A powerful new special congressional committee charged with finding an additional $1.5 trillion in savings over the next decade. The low-key signing ceremony here at the White House came two hours, little less than that, after a 74-26 Senate vote that sent the compromise plan from Capitol Hill to 1600 Pennsylvania Avenue.

That capping weeks of partisan sniping and jockeying in Washington that well we know left you, most of you disgusted. In our new poll tonight said 77 percent of Americans say Congress acted like spoiled children during the debt debate, hard to argue with that. So how unusual was this down to the wire debate? Well you don't see this every day or any day for that matter; this is an announcement from the Social Security Administration saying yes, benefit checks will go out on time tomorrow and beyond.

As we break down the compromise tonight and look ahead to what comes next, this is more than a little sobering. The Dow plummeted 266 points today, its eighth straight day of decline pushed into the negative by yet another bleak economic report -- this one showing a drop in consumer spending. Yesterday it was soft manufacturing data, a few days before that anemic growth numbers. Tough to digest any way, all the more so after hearing for weeks from the president and his allies that this debt ceiling deal was crucial to remove a cloud of uncertainty over the economy.

We wanted to come here to the White House tonight, not just because it was here that the president signed the legislation that took that threat of default over the table. It was also here today where the president began the next stage of a debate that could well determine whether he serves two terms or gets evicted after one.

(BEGIN VIDEO CLIP)

OBAMA: Voters may have chosen divided government, but they sure didn't vote for dysfunctional government. They want us to solve problems. They want us to get this economy growing and adding jobs.

(END VIDEO CLIP)

KING: Our chief congressional -- our chief White House correspondent -- excuse me -- Jessica Yellin is with us tonight with more on the president's jobs agenda and his jobs dilemma, but first to Wall Street and that 266-point drop despite a debt compromise the White House had hoped would inspire confidence in the markets. Alison Kosik live with more on what troubles the markets and Alison, what was it? They don't like this deal in Washington or is it something else?

ALISON KOSIK, CNN CORRESPONDENT: It was a little part of it. Sure Wall Street saw this deal as something that really doesn't stimulate economic growth, but the bigger picture about what's going on here is that there's more uncertainty about the economy. It's those weak economic reports that you mentioned at the top. We found out today there was weak consumer spending for the first time in two years.

That really sent stocks into a tailspin today. You add that to the weak manufacturing report we got yesterday, and then on Friday we got those weak readings on gross domestic product. What it's left is investors wondering where is the growth going to come from, especially as we're going to be getting this jobs report from the government on Friday. There are a lot of worries on Wall Street that it's really not going to show up in the numbers -- John.

KING: Not all bad news today, Alison, one of the concerns during this debt debate is that everybody at home might see their mortgage rates go up, their interest rates go up, because if we were downgraded -- am I right -- two of the three big rating agencies said no downgrade at least not now?

KOSIK: At least not for now, Moody's and Fitch saying you know what, for now the U.S. credit rating can stay at AAA. But you know what, Moody's, they put the U.S. on a negative outlook which pretty much means the U.S. is going to be on probation. These ratings agencies are really going to keep an eye on what happens in Washington, they're going to hold lawmakers' feet to the fire. They want to see lawmakers keep their promises. They want to see these spending cuts really take hold because that downgrade -- this is a process -- and that downgrade reality could still become a reality if these cuts really don't go -- come into play -- John.

KING: Alison Kosik live for us tonight in New York. Let's get back to our chief White House correspondent, Jessica Yellin. So the president has this event today. He gets a deal, not exactly the deal he wanted, but as he wants to celebrate and sign it, he's being reminding by this economic data that this deal is not going to be enough. What is the sense of the challenge here about sure, the deficit is a priority, but the jobs much, much more so?

JESSICA YELLIN, CNN CHIEF WHITE HOUSE CORRESPONDENT: There's no question that the jobs issue is the next focus for this White House and it's why they wanted to get this over with as quickly as possible. The problem is with this much acrimony in Washington, how do you get it done? The Republican agenda is to cut as much as possible and cut entitlement programs.

The president is focused on investments to create jobs. The substance doesn't overlap. Then you have their political acrimony on top of it. And the question is he talks about divided governments versus dysfunctional government. At what point are we just facing dysfunctional government?

KING: And we go into this super committee that will deal with more deficit cuts and the big question the president did not get revenues, the balance he wanted in round one. How hard will he fight in round two especially if you still have the sluggish recovery, will the same argument that twice caused him to back away from his promise to roll back the Bush tax cuts, that we have a slow economy, don't raise taxes now. Could that kick in again as we go through this debate over the next few months?

YELLIN: Absolutely and I'll give you a two-part answer, which is yes, they're going to push hard for tax revenue in this and it's to keep the tax cuts for the middle-class, raise them for high income earners. They think because there's a threat at the end of this, a punishment for the nation that it could happen, the American public will push hard, too. But there's a sense that if the taxes aren't part of this deal, then it could be used in the election. This is what Democrats broadly are saying, if taxes don't come into play, it will be a campaign issue in the 2012 election and you know it will, John.

KING: It will be without a doubt I think, but I'm having a hard time I'm wondering if the president wants to run in a competitive election, saying vote for me, I want to raise your taxes.

YELLIN: It's not I want to raise your taxes. It's that the other guys wanted to slash Medicare and Social Security only.

KING: This debate will continue through this super committee, through December and into the campaign year. Jess is going to be back with us a bit later in the program as we dig deeper into the economic numbers. Let's dig deeper now though into the big news today with our Gloria Borger and David Gergen.

David, to you first; you've advised four presidents. If you were in the White House today, you get what you think is good news. The Senate acts on this compromise plan. No, it's not everything you wanted, but at least President Obama will not be the first president in history to have the nation default on his watch. At least he can show to the American people, OK, it was messy but we're getting things done and as he's getting ready to sign it he's getting more evidence that the economy that he will have to run for reelection on is still shaky if not in shambles.

DAVID GERGEN, CNN SENIOR POLITICAL ANALYST: That's right, John. I must say, I thought that the president would be more celebratory today about the achievement that he did get, which was to avoid default, avoid catastrophe, but there was this rather odd juxtaposition. It was almost as if, OK, I signed the bill, it was the first step, but now I'm going to denounce the agreement. It was almost as if he was sort of disembodied. I'm going to continue fighting for these increases in taxes, you know, where were you in the last fight?

That's what you wanted in the bill and now he is basically saying I'm going to continue fighting it. It sounded more like he was writing an editorial for "The New York Times" than a more traditional presidential statement and, of course, he's now got this bad economic news that I think is reinforced in the stock markets today. Everybody expected the stock markets to rise on the avoidance of a default, on heading off a catastrophe, expected at least a one percent or two percent rise and here we've got a two percent drop.

That's dramatic and it signals tough times ahead and just tonight, John, Larry Summers, who was the president's chief economic adviser as you well know in those early months, in those critical months, has got a piece coming out in "The Washington Post" saying we'll be very fortunate to get down to 8.5 percent by the elections of 2012 and indeed there's a one in three chance that we could have a second recession.

KING: Well, with that grim prediction, grim outlook from one of the president's former top advisers, Gloria Borger, I want you to listen to the president again today. He obviously is hoping -- he could say today yes, you might not love this, it's messy, but Washington did something. Now he's hoping to do more going forward working with a Republican House, a Senate in which the Republicans essentially have veto power. Let's listen to the president's tone and then on the other side talk about what he can and can't get done.

(BEGIN VIDEO CLIP)

OBAMA: We've seen in the past few days that Washington has the ability to focus when there's a timer ticking down and when there's a looming disaster. It shouldn't take the risk of default, the risk of economic catastrophe, to get folks in this town to work together and do their jobs.

(END VIDEO CLIP)

KING: Is there any reason to believe, Gloria Borger, that going forward maybe on the payroll tax cut, is there anything else on the president's agenda in which Republicans will say, sure, we're with you?

GLORIA BORGER, CNN SENIOR POLITICAL ANALYST: I think the payroll tax cut is one. I think maybe he can eventually get some trade agreements and, of course, the Democrats are going to fight unemployment insurance, but I think the table has been set for the 2012 campaign, and the reason the president was not exuberant today and David was talking about this is because he took a sharp turn because he had to talk to his Democrats and say, look, if I'm willing to do adjustments to entitlements but only if we reform the tax code and we, you know, take -- get rid of the oil and gas subsidies for corporations and we take away the tax breaks for billionaires, so I think this is a president who's sort of trying to get back on track here for reelection. But with the market going down today, it was sort of like no good deed goes unpunished; at least that's what someone in the administration said to me today.

KING: And hard, David, for a president to get back on track with this tough economic news, whether he's a Democrat, whether he's a Republican, you know it's not too much president even in good times doesn't have the best leverage to work the economy, so you can't blame him per se, but presidents are --

GERGEN: John, I think that's right. And it's -- the issue here is that, you know, one of the striking things is he's pushing now for payroll tax extension, cut extension, and he's also pushing for jobless benefits. Why in the devil weren't they in the deal? I mean that's what a lot of the -- his supporters can't understand. They are important to people. Why weren't they part of the deal?

And that's just sort of -- the frustration that (INAUDIBLE) feeling on the left and the right is that so many things were left out of this deal ultimately that could -- and payroll taxes is really one of the essentials. Why does he now have to come back and fight for that? Why didn't he get part of the deal to start with?

BORGER: Well he might not have been able to get the deal. I think there was so much worry about the Tea Party conservatives in the House and that it was so precarious that I think they were -- they were nervous that this delicate balance they had could be upset. And I agree with you, perhaps they should have put it in, but, you know, they were -- they were fighting to keep Medicaid cuts out of this.

KING: David Gergen, Gloria Borger, appreciate your insights --

GERGEN: But at the end of the day there is a sense that the Republicans got a lot.

BORGER: Yes.

GERGEN: What did the Democrats get really as a substantive matter and how do they get -- in effect get rolled by this? And that's why there's such disquiet on the left. I know the president has tried hard. I respect him and I actually agree with him on much of the policy side, but there is a sense out there, especially on the left, that so many things that were important to Democratic principles --

BORGER: Right.

GERGEN: -- somehow got swept aside and now we got to come back and struggle all over again about them.

KING: And that is why the left --

(CROSSTALK)

GERGEN: Why should you have faith that that's actually going to happen?

BORGER: I don't.

KING: Left is very skeptical --

BORGER: We'll see.

KING: -- of this president heading into round two and beyond. We'll see how that one plays out. David Gergen and Gloria Borger, appreciate your insights tonight.

Still ahead here, the debt and spending deal is a product of Washington's political pressures, but might it hurt the very economy the president says we need to help? And next perhaps the most important player in brokering this deal, the Senate's top Republican Mitch McConnell on his secret talks with the vice president and the daily pressures he faces from the Tea Party.

(COMMERCIAL BREAK)

KING: We're live from the White House tonight. At the beginning of the negotiations over the debt ceiling there was talk of a grand bargain between the Democratic president and the Republican House Speaker John Boehner. In the end, though, when things went off the track, the vice president's constant communication with the Senate Republican Leader Mitch McConnell helped get another deal, the final deal, back in the negotiation stage. The president signed that deal today into law. And a bit earlier I talked to Senator McConnell about the significant challenges still ahead.

(BEGIN VIDEOTAPE)

KING: So, Senator McConnell, as the president prepared to sign this deal today, he issued a statement in the Rose Garden. I know you agree with the first part. Let's listen and then talk about the second part.

(BEGIN VIDEO CLIP)

OBAMA: This is, however, just the first step. This compromise requires that both parties work together on a larger plan to cut the deficit, which is important for the long-term health of our economy. And since you can't close the deficit with just spending cuts, we'll need a balanced approach where everything's on the table.

(END VIDEO CLIP)

KING: By everything on the table, Leader McConnell, you know the president means taxes. When we get to this super committee and the next step in deficit reduction, are you open, will you appoint Republican senators to that committee who are open to raising taxes? SEN. MITCH MCCONNELL (R-KY), MINORITY LEADER: Well, we're certainly open to tax reform; both the president and ourselves agree that, for example, the corporate tax rate being the highest in the world is -- got to change. We got to bring it down if we're going to be competitive. We ought to look at the entire tax code. So I think there's no question that the joint committee, a very powerful committee that's been granted authority to come back to Congress with a piece of legislation before Thanksgiving to be voted on without amendment before Christmas will have the authority to look at both tax reform and entitlement reform. We expect them to do that. And this is a very, very significant effort. This is not a commission. There are no outsiders on it. This is a joint committee of Congress with real teeth.

KING: And if they get hung up on the broad question of tax reform and they can't figure that out in this committee and the deadline is approaching, and the Democrats say well then let's just extend the Bush tax cuts for the middle-class, but let them lapse, so increase taxes on those above $250,000, a position the president has taken before. Are you OK with that?

MCCONNELL: Well you're asking me to prejudge what the committee might do in November. Obviously I wouldn't be OK with that. But we want to wait and see what they come back with. We've set up this extraordinarily powerful committee, because the way we've been doing things is what's led to a $14 trillion debt and over $50 trillion in unfunded liabilities. We need to do something different in order to get an outcome on this extremely important subject of deficit and debt.

KING: I'm getting a lot of incoming, so I assume you're getting it times probably 10 or 20 or 30 about this committee. Are members of the Senate Republicans coming to you and saying, Mr. Leader, please appoint me, or when they see you in the hall are they turning and running?

MCCONNELL: No, there are a number of our members who are interested. I announced at lunch today I'd be anxious to talk soon to anybody who is interested in being on the committee and I'm in the process of doing that right now and expect to announce my appointments very soon.

KING: Are you under pressure say to name one of the new Tea Party members? What other kind of lobbying pressure are you getting?

MCCONNELL: Well the only pressure is self-imposed. I want to get an outcome for the country, and I'm going to put people on there who have a constructive view about getting a result. We need to fix our entitlements. We need to deal with the challenge of tax reform. We need to get an outcome for the country.

KING: One of the members of the so-called "Gang of Six" which had a plan, a Republican on your side, conservative from Oklahoma, Tom Coburn, writes this in an op-ed. He doesn't think much of this super committee. He said "Supporters say the real savings will come when the joint committee the deal empowers makes recommendations to reduce the deficit. But the enforcement mechanism designed to force these hard decisions across-the-board cuts to defense and non-defense programs will never work. Congress will easily evade these caps." It sounds to me like Senator Coburn maybe wants to be on the committee.

MCCONNELL: Well, you know there's always skepticism. I think this is the most important thing we could have established to give us a real chance at results. We know we haven't been able to get results with the current way we've been operating, so we're going to try to go at it in a different way. And I'm not going to you know declare the committee a failure before it even meets.

KING: In your floor speech before the Senate final passage, you turned to some of the new members and the Tea Party members, and you said you know you might not think so, but you won here by changing the debate in Washington, getting Washington on a path toward deficit reduction. I want you to listen here to one of your freshmen members, Kelly Ayotte from New Hampshire, she clearly disagrees.

(BEGIN VIDEO CLIP)

SEN. KELLY AYOTTE (R), NEW HAMPSHIRE: I am unable to support a bill that delivers the largest debt ceiling increase in the history of our nation but does very little to confront the underlying problems that have brought us here.

(END VIDEO CLIP)

KING: Does she have a point about the underlying problems?

MCCONNELL: Well, I'm sure Kelly would agree with me that the last time the debt ceiling was raised by the Democrats by dropping it into Obamacare and having no spending cuts at all was a lot less desirable than what we've done here. I think Senator Ayotte is among a number of people in our party in both the House and Senate who had hoped to do more and were disappointed that we couldn't. My view is my party controls one House of Congress.

The Senate is a left-of-center Senate, the president is a liberal big spender. We wanted to get as much as we could out of this Congress and this president without raising taxes. We did that. But it's just the first step and we've set a new template, the days of getting clean debt ceilings are over. The next president, whoever that is, John, in early 2013, is likely to be asking us to raise the debt ceiling again. It will generate the same discussion. We will go after additional spending reduction when that request is made.

KING: We've talked about this several times since the election. Many people in the Tea Party movement, they don't think so highly of you. They view you as part of what they call the dreaded Republican establishment that is too willing to compromise, too willing to make deals. Do you think they have learned a bit about your position and your job over this debate in recent weeks?

MCCONNELL: Well regardless of what they think about me, I love them. I think without their effort we wouldn't be in a position to begin to change the direction in Washington. They helped us have a good election last year, in which we took the House of Representatives and now have a robust minority in the Senate. Without them we wouldn't even be having this discussion. In the previous Congress it was spend, spend, spend. No consideration whatsoever for the financial problems the United States has. That's changed. Those days are behind us, and we thank the Tea Party for helping us get in this position.

KING: Let me ask you lastly, sir, about your negotiations with the vice president. This is a deal struck at the White House, but there was a secret channel of communication between Leader McConnell and Vice President Joe Biden, do you prefer negotiating with him than the president, and take us inside that a bit.

MCCONNELL: Well it wasn't a secret that I was talking with the vice president. I talked to the president as well, but the president has wisely designated the vice president to handle a lot of this because he served for a long time in the Senate and knows a lot of us. He's also a good negotiator. He and I are accustomed to working together, but the speaker and the president also worked together. We were all in this together, last weekend, the four of us, and, you know, I think the vice president did a heck of a job representing his point of view.

KING: The Senate Republican leader, Mitch McConnell, a key player in this big compromise. Senator we'll keep in touch as this goes forward. Thank you.

MCCONNELL: Thank you, John.

(END VIDEOTAPE)

KING: Up next is the debt ceiling compromise with all its spending cuts likely to help or hurt the economy? We'll put that question to an expert economic panel.

(COMMERCIAL BREAK)

KING: Here at the White House today -- the president signed that debt ceiling agreement into law, so the United States no longer in danger of default. But if this outcome was supposed to calm Wall Street, well it didn't work. The Dow plunged 266 points today, the eighth day in a row that it lost ground. The S&P 500 is now in negative territory for the year. So will this agreement help or hurt the economy?

The PIMCO CEO Mohamed El-Erian joins us from Newport Beach, California; Reuters global editor-at-large Chrystia Freeland is in New York. Mr. El-Erian, to you first -- Secretary Geithner today speaking this morning, the treasury secretary, listen to him. He casts this agreement as critical to injecting some confidence into the private sector.

(BEGIN VIDEO CLIP)

TIMOTHY GEITHNER, TREASURY SECRETARY: Let's start with what this deal does. The most important thing is it creates more room for the private sector to grow, because although it locks in some very substantial long-term savings, the near-term cuts are very modest.

(END VIDEO CLIP)

KING: Do you see it that way? This deficit reduction plan somehow frees up private sector capital?

MOHAMED EL-ERIAN, CEO, PIMCO: Well, certainly the market didn't see it that way and that's why you've had continuous sell-offs, and what the market sees, John, are three things. One is incredible dysfunctionality in Washington. If we can't sort out a self-inflicted wound, what about all the other challenges that face us?

Second, the market sees weak growth and the possibility that growth will get even weaker. And, third, the market recognizes that this agreement has not stopped the rating agencies from putting the AAA rating of the United States on negative outlook as Moody's did today. So, what the market is saying is at the end of the day we are worse off than we were before the agreement.

KING: And so, Chrystia, the question then is what now? Mohamed mentioned we're sort -- we're in a waiting period, almost purgatory or probation when it comes to the rating agencies, but at least it didn't go down. CEOs have complained for months, you know we're not going to hire until we have more certainty about the tax climate, for example. Well doesn't this deal essentially perpetuate that uncertainty for at least another four or five or six months as the super committee now gets into the question of. In round two will there be tax increases?

CHRYSTIA FREELAND, GLOBAL EDITOR AT LARGE, REUTERS: Yes, I think, John, you're absolutely right. I think the uncertainty lasts for even longer. I think the uncertainty lasts through to 2013. And getting back to your markets question, you know, I think what the markets really told us today was the markets are more concerned about the incredibly weak economy than they are about the deficit.

And that is a message that I think Washington is still not hearing. What to me has been so frustrating about this whole debt ceiling debate is I think American politicians have been asking the wrong question for right now and the question for right now should be how do you get the American economy back on its feet? David Gergen said to you earlier today, John that Larry Summers has written a piece, which you can read on Reuters.com right now, in which he says there's a one in three chance of another recession. That's dreadful.

KING: And, so, Mohamed that is dreadful. The prospect of that is dreadful and when people hear that sometimes they pull back. We see savings rates are actually going up which sometimes is a good thing, but when you have an economy that's trying to struggle its way into recovery, you want consumers if they can, if they can to be spending money. What about the psychology right now of the consumer and the CEO?

EL-ERIAN: They're both weak and confidence has been hit again by this whole debacle. We're seeing a very unusual phenomenon in the United States, John, which is people are keeping cash in their pockets. So we have businesses with trillions of dollars on their balance sheet cash which they're not spending. We're seeing households that can afford to spend pulling back. And this is the phenomenon, what we call self-insurance and Chrystia is absolutely right. Uncertainty is so high and there is so much questioning as to whether Washington can get its act together that people prefer to self insure. Now self insurance makes a lot of sense for an individual, but it doesn't make much sense for a society. And that's why the risk of recession has gone up.

KING: And, so, then, going forward, is there anything this president can do? And I'll broaden the question because we do know the president can't do anything by himself right now. The Republicans control the House. The Senate has essentially veto power -- The Republicans do, on the Senate side. Is there anything Washington can do -- Chrystia, to you, first -- to help inspire that confidence, whether the president wants to extend the payroll tax, he wants to extend unemployment tax, he's talked about trade deals -- is that tinkering around the edges or is there anything in there, if you added up, is it big and bold enough to change the dynamics?

FREELAND: I don't know if it's big enough or bold enough, but at least it's something. I think that payroll tax is a really good idea. Bob Shiller, the Yale economist, has talked about maybe you should go further than that and create some sort of a kitty, he suggested, I think, $20 billion, and say that businesses that hire new employees should get a $5,000 tax break for each new employee up to that $20 billion.

Anything at all, I think there should be lots of creative ideas coming out there to get around the problem that Mohamed has identify which is actually there is a lot of cash on company balance sheets right now and what people should be focusing on, policymakers should be focusing on, is trying to persuade companies to put that cash to work in the economy.

KING: And, Mohamed, a lot of what you hear from the politicians, forgive me, but it's rather predictable. From the Democrats, you hear things that are from the Democratic playbook. From the Republicans, you hear things largely from the Republican playbook.

Is there something new, something bold, that maybe if you get everybody into the room and say, hey, we're in a rut, it's in all of our interests to figure this out, here is something different, try this?

EL-ERIAN: So, John, the framing of the question is very important. I mean, the irony about the whole debt issue is that it was a means to an end and the end was promoting growth and then it became an end in itself, and that's why it hasn't gotten good results.

So, what we need is a proper framing of the question, and the framing of the question is we need to move now to remove structural impediments so this economy can grow again and so this economy can create jobs. We need what we've called the Sputnik moment and not what President Obama referred to in his State of the Union, but something much broader. We need a coordinated approach that deals with four issues -- one is public finance. Yes, it's a medium-term issue. Let's address it in the medium term.

Second, the functioning of the labor market. Our labor markets are becoming more and more inflexible. That's really bad news.

Third, the credit market. Bank lending is very uneven. We need to get that in place.

And, finally, the housing market. Until we sort out the housing market, people aren't going to be willing to move. People are going to feel that their main asset is under threat.

So, what we need is a framing of the debate in terms of the Sputnik moment, and in terms of simultaneous and coordinated action. Not these one-off things that end up taking a lot of time and do not make a big difference to the average American.

KING: And so, Chrystia, as we wait and hope for a Sputnik moment like that, I want you to listen to the White House Budget Director Jack Lew who is standing right here. We had a conversation and he was talking about -- I was trying to ask him to explain how did this administration that came into office pushing a stimulus program, spending money to prime the economy, was now making the argument that deficit reduction, shrinking government spending, would help the economy? Here's his answer.

(BEGIN VIDEO CLIP)

JACOB LEW, DIR., OFFICE OF MANAGEMENT & BUDGET: I think we've said al along, you know, that we need to be in a position to pivot from stimulus to fiscal restraint because the economy can't afford to have the government growing at the rate it was spending at in the -- during the recovery act period.

(END VIDEO CLIP)

KING: Is that an economic argument or is that simply a reflection of political reality that this Democratic president knows the Republicans have way too much power for him to be spending more?

FREELAND: Well, I hate to say it, but I think it's a highly disingenuous answer, because, of course, you do have to pivot and they've been talking about it since the stimulus. But you don't pivot when the economy is still so incredibly weak. And the numbers we got out today showed us that the economy is still really, really off the edge.

So, I don't think this is a pivot of this administration's choosing. This is political forced. And I think that if you talk to them privately, they're not happy about the economic outcome. And that was reflected in the president's remarks.

KING: And for the millions of Americans who are either unemployed or underemployed, it is very a sober moment, looking forward despite this big agreement today.

Chrystia Freeland, Mohamed El-Erian, I appreciate your time tonight. We'll keep in touch as this plays out.

And just ahead, the brutal crackdown in Syria against government protesters, you might not think it's possible, but it gross even worse.

(COMMERCIAL BREAK)

KING: Welcome back. We're live at the White House tonight.

If you're just joining us, here's the latest news you need to know right now:

Will Congresswoman Gabrielle Giffords seek re-election? That's the question that many are asking following her dramatic return to Congress yesterday to vote on the debt ceiling compromise. Her spokeswoman says the congresswoman has not made a decision, that she's focused on recovering from that near fatal shot to the head several months ago.

No let up in Syria's brutal crackdown on anti-government protesters. Activists report at least 30 people were killed today, dozens more wounded and many others arrested. The United Nations secretary-general said the Assad government has lost all sense of humanity.

And the Saudi bin Laden group has been hired to build the world's tallest skyscraper in Saudi Arabia. The company is one of the largest construction firms in the world and was founded by the father of Osama bin Laden.

Up next, whether you like it or not, the Tea Party has shown it's a force to be reckoned with here in Washington. We'll analyze its impact on the debt ceiling negotiations, next.

(COMMERCIAL BREAK)

KING: Go back to this.

We're live at the White House tonight. More of our political coverage in just a moment. We want to alert you, we're not sure exactly what's happening here, so we certainly don't want to alarm you. From time to time, packages are left here and they go on to high alert, but the Secret Service just rushed out of the White House moments ago, guns drawn, is the part that is interesting. I covered this building for eight years.

You see right there, someone has jumped the fence, you see on the video here, crawling on the fence. Sometimes, this happens unfortunately as a stunt. It has happened in the past, something more serious. You see the person has been told by the Secret Service to lie on the ground there. You see the backpack on the ground there.

Watch this situation play out. We'll stay with it live. You're watching -- this is the north side of the White House. That is Pennsylvania Avenue to the left of your screen through the gate there.

Again, officers -- uniformed Secret Service officers coming out of the building and coming out of the compound around here. There were several dozen protesters, which is pretty routine, outside of the fence. They were rushed away by the Secret Service and they voluntarily went away. No indication that this gentleman who has jumped the fence has anything to do with that.

Again, this does happen from time to time, somebody trying to make a political statement sometimes, somebody just answering a dare. As you can see right there, face down on the lawn, following the instructions of the Secret Service.

You see the officers approaching now. It's the CAT team approaching in the darker uniforms, their dog as well. The dogs are capable of sniffing explosives.

Now, you see if you are ever thinking about this, the inevitable result if you hop that fence. Again, we have no indication as to the motivation of the individual who decided to jump the fence here. We're going to watch this coverage. We're going to watch this unfold.

One of the things we don't like to do is give too much coverage to this if it is a political stunt, it would encourage somebody else to do it. So, we're going to turn away from this for now and come back to our coverage. But we will find out for you exactly what has happened here, if the Secret Service has information as to why the individual has hopped the fence, whether or not it was any threat or just a political stunt, we'll get more information as it unfolds.

A bit of a breaking news here at the White House. You never know what happens if you come down here. But the Secret Service as always performing quickly and admirably to bring it to a close. We'll follow up on that.

Now, the debt ceiling showdown is the most vivid proof to date about the policy impact of the big Tea Party gains in last year's elections. In both the House and the Senate, many lawmakers aligned with the Tea Party voted against the compromise. They argued it doesn't cut spending enough. Well, perhaps, it leaves the door open to future tax increase.

But as he delivered the final Republican Senate speech, the GOP leader, Mitch McConnell, had a message for a movement with which he has often been at odds.

(BEGIN VIDEO CLIP)

SEN. MITCH MCCONNELL (R), MINORITY: Now, I know that for some of our colleagues, reform isn't coming as fast as they would like. And I certainly understand their frustration. I, too, wish we could stand here today and enact something much more ambitious. But I'm encouraged by the thought that these new senators will help lead this fight until we finish the job. And I want to assure you today that although you may not see it this way, you've actually won this debate.

(END VIDEO CLIP)

KING: So, let's dig deeper on the Tea Party impact with our chief political analyst, Gloria Borger, and Kate Zernike who's done a marvelous job covering Tea Party politics for "The New York Times," including writing the book, "Boiling Mad: Inside Tea Party America."

You know, Kate, I want to go to you, first. Because in Washington sometimes or when you're taking e-mails, looking at the Twitter feed, some people are surprised. They're shocked that some of these Tea Party lawmakers made such a defining fight over the debt ceiling.

I want to play for a moment an interview I had with Senator Jim DeMint, the conservative senator from South Carolina, a hero to the Tea Party movement. This is the morning after the 2010 midterm elections.

(BEGIN VIDEO CLIP)

KING: If there is a vote in the Congress on raising the debt ceiling so that the government can continue to print money and spend money, should Republicans say no?

SEN. JIM DEMINT (R), SOUTH CAROLINA: I think Republicans will say no. Unless that raising of the debt ceiling is accompanied by some dramatic spending cuts, something that would direct us towards a balanced budget in the future. Republicans will not support an increase in the debt limit.

(END VIDEO CLIP)

KING: So, we watched this play out, Kate, and a lot of Republicans, as you heard Senator McConnell say, the Tea Party Republicans, say this isn't good enough, they don't like it. They don't think they've won, but they have changed Washington, haven't they?

KATE ZERNIKE, NATL. CORRESP., THE NEW YORK TIMES: Oh, absolutely. I mean, they've changed the conversation, and I think this is where some of them are claiming victory today. They're saying we have changed the conversation.

Months ago, last year, we were not talking about cutting spending and now we are. This has become front and center. Democrats and Republicans are both talking about this.

KING: And, Gloria, this is one of my favorite illustrations today. Senator Orrin Hatch, Republican of Utah, someone known in the past as, yes, a conservative, but someone who cut a lot of deals with Senator Edward Kennedy back in the day, the late Senator Ted Kennedy, cut a lot of deals with other Democrats.

He gave a speech today, 1,286 words explaining why he would vote no. Let's listen just a bit.

(BEGIN VIDEO CLIP) SEN. ORRIN HATCH (R), UTAH: But my opposition is not owing to the failure of conservatives or the Republican leadership in the House and Senate. It is owing what is clearly amounting to the failed presidency of President Obama.

(END VIDEO CLIP)

KING: He could have saved a few words, Gloria, right? But I saw what happened to my friend Robert Bennett in Utah last year?

GLORIA BORGER, CNN CHIEF POLITICAL ANALYST: Exactly. You know, he's afraid of being primaried by a Republican House member who is a prominent Tea Party person, and I think you have a lot of Republicans like that. Olympia Snowe, for example, of Maine, who voted to raise the debt ceiling, held out until the last minute after consulting with Republican leaders because it's very clear that she is feeling -- feeling that pressure as well.

So, you know, look, they've had their impact. And in a way, they got the best of both worlds, because the debt ceiling was raised, so independent voters will not think it was too irresponsible. But they made their mark, which was that we have now entered an era of fiscal restraint rather than stimulus spending.

KING: And, Kate, the question now is, what about in 2012? It's hard to carry a movement, the power, the energy over a second time around.

Here's an e-mail the Tea Party essentially threatening Senator Snowe for that vote Gloria just talked about. What's your early sense of how many -- last time we watched them go after establishment Republican incumbents, push the envelope, do we get a sense the zeal continues?

ZERNIKE: I think the zeal certainly continues and I think that's why you see Senator Hatch coming out and making the comments he did. We also see a Tea Party challenge to Senator Richard Lugar, another long-standing Republican senator. So, I think the zeal is certainly there.

Whether the organization is there is a bigger question. I mean, we saw this with the debt ceiling talks. You couldn't -- the Tea Party was not a monolith. Yes, there were Tea Party lawmakers who were saying we're not going to support any increase in the debt ceiling.

But there were a lot of Tea Party voters, Tea Party supporters who said, we do want. You know, we want them to come to some kind of agreement. And I think those are among the people who, you know, your poll talked about earlier who think that Congress has behaved irresponsibly here and they may punish Republicans or just lose their zeal.

KING: Kate being diplomatic, our polls said people thought they were spoiled children. Kate Zernike, Gloria Borger, appreciate your time tonight. Very diplomatic. We appreciate that. Up next here: Why this deal was so important to candidate Obama, and now, history suggests the road ahead in 2012 will be bumpy.

(COMMERCIAL BREAK)

KING: Quick update, a security lockdown here at a White House. You see that backpack. That's a live image of the White House lawn for you. A man jumped over the fence a short time ago with that backpack. He has been taken into custody. You can s how those pictures right there.

There's a lockdown here, though. Until the bomb squad can come in and check that backpack out to make sure -- to make sure -- there is no danger. We're waiting for that procedure to take place here at the White House.

As we do, we will keep you updated. You can see the suspect taken into custody -- this on a day in which the president signed into law the debt compromise agreement.

Now, it's a deal that didn't give him everything he wanted but it was a deal that was very important to the president and candidate Obama.

(BEGIN VIDEOTAPE)

KING: There's no doubt this compromise on the debt ceiling the president signed today fell far short of what he initially wanted. Remember at the beginning, he wanted a grand compromise, $4 trillion over 10 years. He got a little more than half that.

He insisted at the beginning one debt ceiling increase. This compromise -- it's a two-tier program.

And the president also wanted what he calls a balanced approach, meaning he wanted tax increases guaranteed as part of this deal. There is no guarantee of tax increases in the deal the president signed into law.

Yet, despite making so many compromises himself, the president says, not perfect but good enough for now.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: This is, however, just the first step. This compromise requires that both parties work together on a larger plan to cut the deficit, which is important for the long-term health of our economy. And since you can't close the deficit with just spending cuts, we'll need a balanced approach where everything is on the table.

(END VIDEO CLIP)

KING: It is the health of the long-term economy, the struggles in the long-term economy, that make the president worry, not just as president but as a candidate for reelection, because most of the numbers coming out have been pretty stunning when you look at the historical data about reelection.

This is what the government has told us in recent months about the growth of the economy -- GDP got a little better. Then look at this, it starts to flat-line. The last two quarters down here, anemic territory.

A president to be reelected needs to be up here, history would tell you, to be confident of reelection -- the president obviously at the moment well below that. And that's just one of the numbing statistics.

Let's also look at the unemployment rate. We know in the stimulus program passed, the administration said the unemployment would peak at 8.1 percent. We also know that didn't happen. It went above 10 percent at one point. You see the struggles across the line there, at 9.2 percent.

Today, we'll get another report from the government on Friday on this front. But, again, since FDR, decades ago, no one come and won reelection with a rate higher than 7.2 percent. There is no doubt this president will be trying to defy that history. This line down there, he's well above it, right now.

If the unemployment rate is up, well, that's pretty obvious -- what's up with job growth? Watch the job growth in the Obama administration. In the negative early on because of the recession. Then we came out a little up and down. This is the most troubling part in recent months. Again, we're going to learn more on Friday about last month.

But to be reelected, a president needs to be up here according to all the historical data. President Obama at the moment well below that -- yet another troubling sign for the Obama reelection campaign there.

Also, beyond the economic statistics, your psychology about the economy, consumer confidence is very important in how you vote. May, June, July, this the University of Michigan study. You see the drop right here, 63.8 percent.

To be reelected, in recent years, any president above 95 percent gets a second term. Down below, you're in the dicey territory -- which is exactly where President Obama finds himself right now.

Let's just recap where we are so far when you go through the economic statistics -- GDP, growth in the economy, nowhere near where the president needs to be. Growth job growth in the economy, again, well below where the president needs to be, to be comfortable about his reelection.

And how you feel, your attitude about the economy, also way down here. So, as the president signed this deal today, he made the pivot to the issue he knows is number one -- jobs.

(BEGIN VIDEO CLIP) OBAMA: What can we do to help the father looking for work? What are we going to do for the single mom who's seen her hours cut back at the hospital? What are we going to do to make it easier for businesses to put up that "now hiring" sign?

(END VIDEO CLIP)

KING: Here's one of the things the president is trying most to change as we move this off the screen, how you feel about the state of the country, right track, wrong track, satisfied or dissatisfied?

Seventy-nine percent of Americans in a Pew Center study just recently, 79 percent say they're dissatisfied with the direction of the country. That means eight in 10 Americans think the country is heading in the wrong direction.

Hard to get reelected to say give me for more years when so much of the country is in a funk. The president needs to change that.

We also know from recent data that the president has been sliding among white voters. 2008, about an even split, Republicans with an edge but a slight edge. A new Pew Center study says, look at this, 52 percent of whites now say they plan to vote Republican, 39 percent Democrat. So, that's one big drop the president faces when he looks it at the Electoral College map, trying to pick states for 2012. That's one alarming sign.

Here is another one and this one is incredibly important to the White House. March, May, July -- look at that drop, 31 percent of independents now say they would like to see President Obama reelected. Well, you can se the drop anyway.

Here's where it's important. In 2008, in that big Obama win, he had 52 percent support among dependents. That's a 21 percent drop. The president cannot afford that come November 2012, which is why again as he prepared to sign the deal today, the president's message aimed right at voters in the middle saying they want Washington to get things done.

(BEGIN VIDEO CLIP)

OBAMA: So, voters may have chosen divided government, but they sure didn't vote for dysfunctional government. They want us to solve problems. They want us to get this economy growing and adding jobs.

(END VIDEO CLIP)

(END VIDEOTAPE)

KING: A reminder there of the economic challenges facing the country, facing the president as president and also facing the president as he prepares to campaign for reelection -- a daunting challenge ahead.

We'll stay on top of that story. Also we'll update you as the night goes about the security challenge here at the White House tonight, a lockdown after a man jumped the fence. The backpack being checked out.

That's all for us tonight, though. We'll see you tomorrow.

"IN THE ARENA" starts right now.