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STATE OF THE UNION WITH CANDY CROWLEY

Interview With Lawrence Summers, Steve Forbes; Interview With Governor Jerry Brown; Interview With Tom Davis, Anita Dunn; Interview With Mike McConnell

Aired August 7, 2011 - 09:00   ET

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


CANDY CROWLEY, CNN ANCHOR: The credit worthiness of the United States government is called into question and the stock market posts its worst week in more than two years.

Today, the threat of a double dip recession, with the president's former top economic adviser Larry Summers, and the CEO of Forbes Inc. Steve Forbes.

Then Washington from afar with California Governor Jerry Brown.

(BEGIN VIDEO CLIP)

BROWN: The Washington of today is suffering and experiencing a governability crisis.

(END VIDEO CLIP)

CROWLEY: And the week seen through the prism of 2012 politics with former Obama adviser Anita Dunn and former Republican congressman Tom Davis.

Plus, retired Admiral Mike McConnell on the looming dangers of international cyber attacks.

I am Candy Crowley, and this is State of the Union.

A better than expected jobs report was the only upbeat economic note this week, and it pushed off the front pages when one of the big three credit rating agencies, Standard & Poor's downgraded the U.S. government's credit rating, the first time that's ever happened.

(BEGIN VIDEO CLIP)

JOHN CHAMBERS, S&P: It's a matter of the medium and long-term budget position of the United States that needs to be brought under control, not the immediate fiscal position, it's the one that centers on entitlements and its entitlement reform or having the matching revenues to pay for those entitlements that's at the crux of the matter.

(END VIDEO CLIP)

CROWLEY: Joining me now from Massachusetts Larry Summers, former director of the national economic council under President Obama and Treasury Secretary under President Clinton. And in our New York bureau Steve Forbes, the president and CEO of Forbes Inc, and a former Republican presidential candidate.

Gentlemen, thank you both. I can't think of two men better to try and explain to me what to make of the downgrading of the U.S. government's credit rating.

Let's start with you, Steve.

STEVE FORBES, PRES. AND CEO, FORBES INC.: Well, I think in a narrow sense, it is a political move, and I think it's really -- it'll sound strange for me to say it, an outrageous move. The government can pay its debts, it's legally obligated to do so. It's got the wherewithal to do it. In a larger sense about the economy, I think the U.S. economy is in a perilous state. This recovery has been the worst from a severe recession since the Great Depression, but I am surprised S&P would play politics. The U.S. government can pay the interest and principle on the bounds.

But in a broader sense, we do have severe economic troubles but will be able to pay the interest and the principle on the bounds.

CROWLEY: Larry, I'm going to have to believe that you're going to agree with him, because I have heard this weekend from any number of administrative officials pushing back so hard against this, talking about how amateurish it was, that S&P is looking for its 15 minutes of fame. They really think that this was an unjust move.

Give me your take on why you think S&P did this. And do you agree with that?

LAWRENCE SUMMERS, FORMER DIRECTOR, NATIONAL ECONOMIC COUNCIL: Look, S&P's track record has been terrible, and as we have seen this weekend, its a arithmetic is worse. So, there's nothing good to say about what they've done.

But that's not the large issue here. The large issue here is that the House majority played chicken with America's credit worthiness, and America's families are going to be the losers, losers in terms of higher interest rates on their mortgages, losers in terms of what this is going to mean for employment, that we've got critical economic problems. The critical economic problem of slow growth and lack of jobs, the critical economic problem of a long-run budget situation that needs to be adjusted and needs to be adjusted in a rational way, and we have to find balanced approached going forward. Balanced approaches to focus on the jobs deficit.

CROWLEY: If I could, Larry, if this was an unjustified move by S&P, and a political move and an attempt to get them to get out in front and into the headlines, how can you then blame Republicans for it?

SUMMERS: Look, Candy, the -- Steve is right, the United States is going to pay its debts. The United States -- look, S&P said to sell, Warren Buffett said to buy. That should tell you something about the quality of U.S. bonds.

At the same time, this happened because S&P was seeing what most Americans are feeling, which is unhappiness with the solutions that are coming out of congress for critical economic problems. To say that S&P is suspect is fought in any way to say that all is well, and the productive thing here is not to bash on S&P, even if they deserve some of that, the productive thing is to focus on what we can do going forward. CROWLEY: Steve, do you agree --

SUMMERS: What we have just been through... CROWLEY: I just want to bring Steve in here on this. Do you agree that this was brought -- I saw you shaking your head, so I know you don't agree. Do you agree that this has something to do with Republicans and their refusal to go ahead and come up with a broader deal or agree to some kind of tax increases?

FORBES: Well no, I think the Republicans were elected precisely to try and undo the fiscal damage this administration has been doing to the country. What is holding this economy back is a weak dollar, you never get a strong sustained recovery with a weak currency, uncertainty about taxes, massive new regulations coming from health care, finance.

The National Labor Relations Board is doing things it never has done before, telling companies where it can move and not move, all of these regulations are hurting, banks are not lending because of the uncertainty, and that's why this recovery has been so weak.

If the administration would change policies we would start to see a real recovery.

CROWLEY: How do you think the markets, just to wrap up the credit worthiness downgrade, how do you think the markets are going to react to this?

FORBES: Well, I think the markets are going to be a little uncertain. The key thing is whether the two other rating agencies are going to follow S&P. I don't think they will. And if they don't, the reaction is going to be rather minimal.

But we're going to have fallout because of the uncertainty. States don't know what they are going to do. S&P may downgrade major insurance companies, which means they're going to have to raise more capital. So it's just another well up of uncertainty.

CROWLEY: And to the consumer, does that mean the sorts of things that Larry outlined that the -- do you think interest rates are going go up? Do you think this will have a practical affect on Americans?

FORBES: It'll have a slight increase in interest rates, but the key thing is, on interest rates, is the federal reserve, which is really punishing savers by its zero interest rate policy, it's killed the inter-bank markets, so you don't get liquidity going to where it is needed.

So you put it all together, the Feds weak dollar policy is the real disaster. We'll get through the S&P thing. I think it was a political move, market move, but the key broader thing about the economy, weak dollar, uncertainty about taxes, massive new regulations, that's what is holding this economy back.

CROWLEY: Larry, let me -- I know you are going to want to pick up and argue with Steve about what is going on in the economy since you were present and accounted for in the administration when some of the policies were put into effect.

But I think the question now that has been shown up in a number of headlines is, are we looking at another recession, a double dip recession as it's described, and if so doesn't that speak to a failure of current administration policies?

SUMMERS: There's certainly a risk of recession, but god knows if we had not pursued these policies, we would be looking at another version of what happened in the 1930s.

Steve's thinking about raising interest rates, and cutting liquidity in the midst of an economic downturn is the thing that made the depression great. You know, if you look at what happened in the first six months, the winter of 2009, various indicators were falling faster than they had after 1929.

What we are living with is completely unacceptable, but it is very difficult from what happened during the depression, and that's a tribute to the policies that were pursued. That's a tribute to the decision to inject funds on a substantial scale into the economy, to stress test and make transparent what was happening in the banks, to provide liquidity.

Without that the situation would be far worst than it is.

CROWLEY: And yet, Larry...

SUMMERS: We need to know -- we need to do more of that. And unfortunately, at a time when, you know, the State of Nevada has a manual for looking at infrastructure. And it says that if you delay repairing a highway in certain situations by two years, the cost of doing that repair costs five times as much.

We are not making those investments to pay off five times in two years at a time when the interest rate is at a near record low, at a time when nearly one in five construction workers aren't working.

It makes no sense not to be investing and putting people to work...

CROWLEY: So you're basically talking about a second stimulus here in some -- a more infusion of government money into the economy, to kind of stave this off.

And let me ask you, and can you answer that, but the economic recovery such as it is at the moment, the growth is slower than you all thought it would be and that you all predicted, meaning the Obama administration. Unemployment is higher at this than you all predicted it would be. So doesn't that speak to some kind of failure within the administration?

SUMMERS: I don't think so. Forecasts have enormous uncertainties. Nobody in or outside the administration foresaw the kind of European financial crisis that we have had in the last couple of years, no one foresaw how high energy prices would rise. These have been adverse shocks to the economy.

But, look, the president saw this coming at the end of 2009, the president proposed and the then-Democratic House of Representatives passed legislation that would have extended unemployment insurance faster, done more for state and local governments, made necessary public investments in our infrastructure. Unfortunately the Congress was not willing to go along with that legislation.

So you can't judge simply by saying that the economy is not where we would like it to be. It would be much better if all of the president's suggestions had been followed and it would be much worse if his early measures had been blocked.

CROWLEY: Let me bring Steve in on this. So, basically, what is being argued here is that more was needed to kind of prime the pump of the economy, that had the president gotten his way, more money would have been -- and the people around him, more money needs to be put in.

We are looking, Steve, at 9.1 percent unemployment rates, and there are a huge number of economists arguing that that's exactly what you need, that you do need more money for construction work, anything to get people back to work and prime that pump.

FORBES: Candy, when you have a severe downturn, the normal reaction is to get at least initially a good upturn. The question is why aren't we doing better? Stimulus money. Where does it come from? It doesn't comes from manna from heaven. It comes from we the people, either through borrowing, taxing, or printing of money which is another form of taxation.

Japan has been on this path for 15, 20 years, it has been an abysmal failure there. Low interest rate policy, artificially kicking -- tamping down rates, massive binge spending and borrowing. It does not work.

And that's why this recovery, we're like an automobile going 25 miles per hour, when at this stage we should be on an open highway, be going 70, 75 miles an hour. Again, you never get a sustained recovery when you trash your money. You never get a sustained recovery when you have a massive binge in spending or massive uncertainty about taxes, and all of these new regulations that are coming, it creates uncertainty and people hold back.

That's why private capital in this country is fleeing overseas. They don't see productive investment opportunities here at home. And that has to be laid at the feet of the Obama administration. They are the ones that put in this massive spending and the health care and all of these other regulations. You can't blame that on George Bush.

CROWLEY: In the less than minute I have, and this goes first to you, Steve, if I could get a quick answer from you. If I had $1,000 to invest right now, where would you put that money?

FORBES: You should put it in the stock market in a broad-based index, because I think in a year, year-and-a-half, this country is going to turn around, just as it did after the abysmal decade of the 1970s, it turned around in the '80s and '90s.

So this is the time to get in, when everybody else is fleeing.

CROWLEY: And, Larry, let me ask you the same question, $1,000, what would you do with that?

SUMMERS: You will have to use your best judgment, but if you think that Washington will come together on a balanced approach to growth and the deficit, then certainly the United States is the place to put your money.

CROWLEY: Larry Summers, Steve Forbes, can't thank you both enough. We really appreciate your expertise on this. I hope you will come back.

FORBES: Thank you.

CROWLEY: Coming up, a dire warning from the West Coast. My interview with California Governor Jerry Brown.

(BEGIN VIDEO CLIP)

GOV. JERRY BROWN (D), CALIFORNIA: This is real peril, and I don't think I've ever thought that about the United States before.

(END VIDEO CLIP)

CROWLEY: The U.S. economy, the world's largest, has been rocked in the past several years, and so has the world's eighth-largest economy, California. At 11.8 percent, it has the second-highest unemployment rate in the country, the third-highest foreclosure rate and ranks, and ranks second only to Nevada on the Associate Press Economic Stress Index.

Last November California went back to the future in search of a chief executive, electing Jerry Brown. Brown first served as governor 36 years ago. He was one of the youngest governors ever in California, now he is the oldest, wiser and tougher.

(BEGIN VIDEO CLIP) BROWN: Choices have to be made and difficult decisions taken. At this stage in my life, I have not come here to embrace, delay, and denial.

(END VIDEO CLIP)

BROWN: Unable to convince Republican state lawmakers to even let voters consider tax hikes, Brown signed a state budget this summer with steep cuts in education and state services for the poor, the elderly and the mentally ill.

My conversation with Democratic Governor Jerry Brown, next. (COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

CROWLEY: Governor, first of all, thank you so much for joining us. I wanted you to take a California look at what has been going on in Washington. We have just finished up a very grueling debt debate. From your perspective, what did that tell you about Washington?

BROWN: Well, the obvious is that it's dysfunctional, but more than that, that the Washington of today is suffering and experiencing a governability crisis. America can't govern when you have two parties so diametrically opposed, I think that is an ominous sign going forward.

CROWLEY: Do you have a solution for that? Because I think you are right, I think people look and say, they are on different planets, and it's no wonder they can't come to an agreement. What do you think would help?

BROWN: I will tell you, we are at a crossroads that if the Republicans cannot give up some of their ideological baggage, and if the Democrats can't find a way to create common ground, the country is going to face some decline.

BROWN: And I think the only way out of that would be a very vigorous election where people lay out the stark alternatives, not muffle it like politicians like to do, kind of, you know, smooth out the rough edges.

I think we need a very clear, decisive election. I would say that the Republicans are gearing up to destroy the president, that the president will have to respond in a very powerful way, and the result for the country could be calamitous.

CROWLEY: What does his response have to be? What's that powerful response?

BROWN: He has to be authentic; he has to be powerful. He has to lay out a clear alternative and run a risk that may not work out for him, because the society is in the mood where it wants a lot of things but is not willing to pay for them.

CROWLEY: So you think the president needs to run, saying, "Folks, we need to raise taxes"?

BROWN: Well, I wouldn't quite put it in those terms, because that, we know from Mr. Mondale, is a big fat loser.

CROWLEY: Well, exactly, but you're talking about stark contrast?

BROWN: Well, the contrast is what the choice is. If you don't want to pay the taxes, you've got to cut Social Security, the military, research, highways, hospitals, schools, universities. You have to retrench from being a great superpower. And I think there is a bill at the end of that that people might be willing to pay. If they don't pay it, America will never be the same.

So there is the tax reform; there is the deductions, the loopholes. There are a lot of ways that the president can present it, but it may be that, because of the propaganda or the state of indulgence where we are, maybe the truth cannot be spoken in a way that makes it a successful campaign. And if that's true, then we are really in for it.

CROWLEY: Let me ask you, on the specifics of the debt crisis and some of these confrontations that the president has had with the Republicans, how do you -- assess his performance for me. How has he done, as far as you're concerned? BROWN: Well, the trouble is, with the loss of the House, he's in a defensive position. I support -- support him in what he is trying to do. I just think he has to dig down into his own soul and -- and connect with the people of America at this hour of -- of peril.

This is real peril, and I don't think I've ever thought that about the United States before. But if we can't govern; if we're going to just be a divided government, our adversaries, the rest of the world, the dollar, the market, the global economy -- this is not good.

Today it appears that the ideological obsessions, particularly the no-tax identity, is so strong that compromise is no longer a viable concept.

Now, it would be better if we had more accommodating political parties. And it isn't that the Democrats are free from blame; they're going to have to look at the entitlements and do something about it.

CROWLEY: I was going to ask you about that. Because isn't that as -- clearly, I mean, you're a Democrat and I understand, you know, you come at it from that position, but I think Republicans would argue that this whole idea that you can't touch Medicare; you can't touch Medicaid; you can't touch Social Security -- that kind of thinking also needs to be dropped?

BROWN: Well, because it's good to make -- score points off the Republicans by saying they're going to get rid of Medicare, which in many cases is true; however, given the overcommitment and underfinance of where we are, we're going to have to reshape all these programs.

In California, we're trying to get a waiver right now from the Obama administration to cut our Medicaid costs, and we so far are not getting anywhere.

So, yeah, the Democrats have to wake up; we've got to constrain costs; we have to find some tax loopholes to close or other revenue, and, yeah, you know, it's not pleasant.

CROWLEY: Governor, I want to ask you to stick with me. We're going to take a quick break. When we come back, we're going to talk about California's particular problems, and they are mammoth, as I know you know.

We'll be right back.

(COMMERCIAL BREAK)

CROWLEY: Welcome back. We're sitting here with California Governor Jerry Brown.

Again, thank you for joining us. I was really struck by an L.A. Times -- a paragraph in the L.A. Times description of the budget that you signed.

And in part, it said "The plan contains severe cuts, including reductions of about 23 percent to public universities, raising the price of medical care for the poor, closing senior seniors and cutting welfare grants and cash aid for the elderly and disabled. Seventy state parks are slated for closure. Community college fees on the rise, and mental health programs will be trimmed heavily."

That's from -- that's a Democratic-signed budget.

BROWN: That's the Democrat, right. It doesn't sound like it, though, does it?

CROWLEY: It doesn't.

BROWN: Well, there's another aspect here, and that is we have to live within our means. I proposed that we did half cuts, painful cuts, many of the ones you just read, but also half continuing the tax revenues that my Republican predecessor put in place but which expired.

Well, the Republicans wouldn't give me one vote in order to have that balanced program, so we have to cut. And I'm going to continue. We are not going to borrow; we're not going to (inaudible); we're going to put our books in order. But it's going to be very painful and we're going to do things that I don't think are the things we ought to do.

CROWLEY: It looks like a strategy to, sort of, force the public or the Republicans into saying, let's raise taxes rather than to cut this bone?

BROWN: That's not the intention, but it is the consequence. And I do think, as a state as wealthy as almost all the countries of the world -- our gross domestic product in California is $2 trillion. To find another $10 billion in additional taxes does not, to me, seem excessive. In fact, it seems like it makes a lot of sense.

At some point, I would hope that people would be willing to pay some more money. And if necessary, I believe there will be, on the ballot next November, opportunities for the people to say, yeah, I'm willing to pay a little more money.

If they don't, we will continue to retrench, and we will erode the university, the safety net, the roads, the firefighting, the prisons, the jails. So I will engage in a dialogue with California to -- to forge another path that's more positive.

CROWLEY: You're a fiscal conservative?

BROWN: I'm willing to spend. I like to invest. But I don't think you can borrow all the time. I don't like borrowing. I don't like debts. We are out way beyond the ledge of responsible fiscal management, so I am pulling us back.

CROWLEY: You have a -- a slightly under 12 percent unemployment rate. Do you have a plan to bring that down?

BROWN: Over the long-term. The folks in Washington can't make up their minds, the Republicans say cut government, spend less, the liberals say spend more in the Rooseveltian way of putting America back to work, which is what I believe.

CROWLEY: You have no stimulus funds?

BROWN: Well, we have bond funds. And we are spending money on a massive, multi-billion dollar renewable energy program. We have high speed rail.

CROWLEY: Long-term.

BROWN: We have water projects. But that's what states do.

The short term is the Federal Reserve, it's the congress.

CROWLEY: But in the short term, and let's define that as two, three years, you see California, if there is no help forthcoming from the government, and there seems to be no money left for a second stimulus.

BROWN: Well, that's the plan right now. The stock market keeps falling maybe people might look at themselves in the mirror, and say is this what we want for America? Do we really want to...

CROWLEY: Do you see any help in California absent any help from the federal government in the near term staying where it is?

BROWN: Well, when I was governor the last time we kind of I think got up to 11 percent. So this happens. There is no magic bullet other than stimulus, and stimulus has been stigmatized by the Republican leadership. And they want America to go through this, you know, straight jacket, and this is where it is, that's the gamble.

I think come November, the American people will have a better understanding of the choices, and it really is a stark choice, I think, that we are facing.

CROWLEY: I sense that you are angry?

BROWN: No, I am not angry. I am just alarmed at where America is. So I would just say, we better be very careful where we're going, and I hope that we watch it, we being the congress and the president.

And the president is the one that really has the most opportunity to turn this around.

CROWLEY: Thank you so much. Appreciate it.

BROWN: OK, good.

(END VIDEOTAPE)

CROWLEY: This weekend, Texas Governor Rick Perry is in the national spotlight with his day of prayer. Is he the Republican that could shake up the presidential race? We will ask our political panel next. (COMMERCIAL BREAK)

CROWLEY: Joining me now, former White House communications director, Anita Dunn, and former Republican congressman Tom Davis of Virginia.

Rick Perry, the governor of Texas, waiting on the sidelines, everyone expects he's going to get in. Let's assume he does. Was he smart to wait? And does he shake up the race?

FORMER REP. TOM DAVIS (R), VIRGINIA: Well, he is flavor of the month right now. You saw Donald Trump announces, he goes to the head of the pack. Perry announces, he goes to the head of the pack. But there's a long way to play now. His record will be scrutinized. He is going to find out on the right, Michele Bachmann has been out there. It's going to be hard to shake some of those people away.

It's tough getting in this late actually.

CROWLEY: And, you know, it does remind me a little bit about Fred Thompson the last time around when everyone waited and waited and waited and it was going to be him. He was going to save the party and he tanked from almost the first day.

ANITA DUNN, FORMER WHITE HOUSE COMM. DIRECTOR: You know, Candy, people who want to be president generally just start running. They don't kind of wait for everything to be just perfectly in place.

I think that Iowa is going to be very interesting this week. And you know obviously, I think you guys have something going on out there. But it's going to be very interesting to see how these candidates all react to each other given the fact they have not been together for a couple of months now.

So much has happened since then. And that really I think that the winner of this kind of period since the last debate has been Michele Bachmann. And Rick Perry getting in on paper appears to hurt her the most, but we will see in terms of who is the alternative to Mitt Romney, who is the frontrunner.

CROWLEY: In straw polls -- we have a debate coming up this week in Iowa. We also have at the Ames straw poll, which everyone sort of not -- you know who doesn't watch this world goes, the Ames straw pool. In your experience, how much has the Ames straw poll, which is basically how many of your supporters can you get to Ames, Iowa, in August to vote for you? How much has it every shaped a race? DAVIS: I don't think -- I mean, Huckabee won it last time and didn't win the state. And I am not sure how important Iowa is now...

CROWLEY: Actually, other way around Mitt Romney won...

DAVIS: Romney won but...

CROWLEY: And Huckabee won the state, yeah. DAVIS: But the reality here is I don't think much. And I am not sure how much Iowa matters now except it will take some people out of the pack. But it's so different from New Hampshire. And I'll just add these are Republican activists, this isn't even a primary, this is a convention.

CROWLEY: Right, right.

DUNN: But one thing that the Ames straw poll I think can tell us this week is whether any of the candidates are being successful of doing what Obama did in 2008, which is to enlarge the universe of people who potentially attend the caucuses. Let's not forget Pat Robertson surprising everybody with his supporters actually coming, where everybody was like, who are those people?

And you know there are a few candidates in this field who potentially can do that and obviously, you know, getting outside of the mainstream usual activists, give somebody a much better shot at winning that caucus. And this caucus will be a contest to see who really is an alternative, and who gets to go on to New Hampshire.

CROWLEY: Right. Who is not Mitt Romney?

DUNN: Right. Who is not Mitt Romney.

CROWLEY: Let me -- I want to switch gears here...

DUNN: A lot of them aren't Mitt Romney, actually.

CROWLEY: Yeah, a number of them, but there can only be one, I think, as the theory goes.

I want to switch gears. And sort of switch to your side of the aisle and give you a little something from late-night TV here.

(BEGIN VIDEO CLIP)

CONAN O'BRIEN, CONAN O'BRIEN SHOW: Yesterday a man jumped the White House fence. Did you hear that? Yeah, but after a brief chase, Secret Service was able to talk President Obama into coming back and continuing his time.

(END VIDEO CLIP)

CROWLEY: That was Conan O'Brien joking about a fence jumper, only it was the president trying to get out of the White House.

So pretty bad week for the president? Would you... DUNN: A pretty bad week for Congress, which according to the New York Times poll that was released on Thursday has its lowest rating ever from the American people. And 82 percent unfavorable. And, you know, there's nothing to say can't go lower.

DUNN: And they certainly seem to be trying to do that. You know, a bad week for the country, a bad week for everyone.

I think that the president, who started the week, you know, by a compromise debt ceiling deal that, you know, we never should have had to...

(CROSSTALK)

(LAUGHTER)

DUNN: ... you know, that's fundamentally, you know, really -- really is smaller than he would have liked, did not represent the kind of bipartisan work that the problems of this economy suggest we should be having.

You know, Candy, I was reminded this week of 2008 in September, and when the -- when Lehman collapsed and the stock market dropped by 800 points. And these are leadership test moments.

You know, back then, Obama, who was their Democratic nominee, you know, McCain, everybody, kind of, worked together, OK, because it was such an economic crisis.

Contrast that to this week with the Republican candidates out there all saying they would have voted against the debt ceiling, which would have been a crisis in and of itself, with the Republican candidates, you know, using this downgrade to take cheap shots at the president. These are leadership tests. And, you know, I think he passed it this week and they did not.

CROWLEY: In the end, can the president say -- can the president run saying, you know what, I'm the adult; I'm not, you know, taking cheap shots, and if I could just have a more Democratic Congress, we could get some stuff done?

DAVIS: No, because they tried that and the voters rejected it. Look, you've got 20 percent of your houses -- your homes are underwater at this point. You have 9 percent unemployment. You've got this downgrade. It's a bad narrative.

It's really hit on the whole political establishment in both parties. And the question is who's going to take the blame at the end of the day.

CROWLEY: Right. DAVIS: But we've tried one-rule party, and the voters came back. This is a time for the parties to come together, if ever they can do it, because I think they're both going to take hits in the primary...

(CROSSTALK) CROWLEY: I totally agree with that. My theory is, if you're an incumbent, this was a bad week for you to be sitting in Washington claiming, you know...

DAVIS: And you better fix it. And you better fix it. Right now, they're just -- they continue to point fingers at each other, saying it's the other guy's fault.

DUNN: That's absolutely right. And, you know, if you look at the tone deafness of people this week, saying, oh, it's your fault; it's your fault; it's your fault, what the -- what people in this country want is who is going to work together to create some jobs, to get this economy moving, to do something that actually helps my family, that's relevant to me?

And right now, Washington and Congress have never seemed more tone deaf. And I think, if I'm an incumbent this week, I'm thinking about a different path for the future.

CROWLEY: What -- be a consultant for the Democrats at this point. What's the president's slogan going forward into a re-election bid?

DAVIS: His slogan right now is "They're worse than I am." I mean, that's his slogan. But you've got to go back to 1948 and Harry Truman, when he ran against the Congress. It's harder for this president because you have a Democratic Senate, but he's got to come up with a program, send it up.

But he's -- right now, he bears the responsibility, I think, with voters for what's on the ground. He may not have caused it, but he hasn't fixed it. And right now, they don't see any solutions coming out.

CROWLEY: And I'll let you even advise him, you know, as I know you still do. I mean, what is the president's pitch to voters when they're looking at currently 9.1 percent unemployment, all these houses underwater?

I mean, things that really matter to people, when they sit around their kitchen table, are bad.

DUNN: That's exactly right. And the president's pitch to voters and the choice that voters are going to have in 2012 is going to be, you know, who actually is going to have a solution to this?

And what you've seen from the Republican candidates, across the board, the people who would be president right now, the men and women who are running, is -- are people who won't even stand up to the most extreme elements of their own political party, who this week alone, people like Mitt Romney, who, you know, likes to tout his business background, who said he would have been against the debt ceiling agreement and who turns around, you know, to do the cheap shots -- no solutions.

These -- the Republican Congress hasn't offered any solutions, and their programs have been roundly rejected, from the Paul Ryan budget that would have eliminated Medicare to the cut-cap-and-balance. And so it's a choice here. It's a choice.

CROWLEY: I'm going to -- I'm going to...

(CROSSTALK)

... because we're running out of time, because we've got one more guest. But I -- I'm going to assume, Tom, that you would say, but the Republicans can argue that the president's solutions didn't work?

DAVIS: Well, they didn't work. He had two years of everything -- more important -- and look, with everything else going on, what is on the ground matters. And right now, the people are suffering. Unemployment is high. Houses are underwater. We've lost our credit rating with one of the major houses. The wars aren't going well. And they look to the president on these kind of issues. And blaming right-wing Republicans is a narrative that just is not going to fly.

CROWLEY: My advice, as always, run as an outsider.

(LAUGHTER)

Tom Davis, Anita Dunn, thank you both so much for joining us.

DUNN: Thank you, Candy.

DAVIS: Thanks.

CROWLEY: Up next, the danger of cyber attacks on the United States.

(BEGIN VIDEO CLIP)

VICE ADM. MIKE MCCONNELL, FORMER DIRECTOR OF NATIONAL INTELLIGENCE: If the nation went to war today in a cyber war, we would lose. We would lose. We're the most honorable. We're the most connected. We have the most to lose.

(COMMERCIAL BREAK)

CROWLEY: Joining me now, retired Vice Admiral Mike McConnell, former director of national intelligence.

I know this is a subject that you're interested in, and we were struck this week by a report from McAfee that said that, over the past five years, over -- there have been over 70 victims of cyber spying, countries -- the U.N. was also included in this -- and that the spying was done by a state actor, which -- the same one, which everyone assumes to be China.

When you looked at this report, what worried you the most?

MCCONNELL: When I saw the report, I was glad to see it. It's now making the information available to the public. And, Candy, the way I would describe the report is the tip of the iceberg. It's much worst than what was included in the McAfee report.

CROWLEY: And what do they do -- I mean, what is -- let's assume this is China. Let's assume this is a state. What are they looking for when they -- I'm assuming they can hack into the U.S. government at many levels. What are they looking for?

MCCONNELL: All governments, sophisticated governments, run an electronic espionage effort. The G8 are the most sophisticated. The United States has a policy of looking for adversaries who might wish us harm, military secrets, military capabilities and so on. We have a policy of not doing economic espionage.

Not all those G8 countries have the same policy. In fact they focus on economic espionage.

CROWLEY: Economic espionage would be, for instance, hacking into the Treasury Department to see -- Internet to see what's going on there?

MCCONNELL: Could be Treasury, could be an oil company, it could be a Silicone Valley start-up, it could be aerospace, anything that would allow the country to have their competing economic activities, have an economic advantage.

CROWLEY: So we could do it to others on an economic basis.

MCCONNELL: We could.

CROWLEY: We confine it to the military. But do we have a defense? I mean, isn't there some way to kind of -- security walls, right?

MCCONNELL: We should. It is not nearly as sophisticated as it needs to be. As a matter of fact, the nation does not even practice good -- what I would call cyber security hygiene. We could eliminate much of it if we just did the basic things, be aware, change passwords, configure our systems appropriately, but we don't.

And we're in a situation now where this nation state is literally bleeding the intellectual capital and innovation engine out of this country. And if that persists for a long time, it's going to take away a significant economic advantage that we have.

CROWLEY: And so it's -- and so in that presumably they can get company secrets.

MCCONNELL: And do.

CROWLEY: A U.S. company, that kind of thing.

MCCONNELL: Think of it like patent information or a new product or a new software or a new idea. If you can go into a company's computer systems and extract it, particularly if you have a labor force that works at a lower rate and you can turn quickly, then you can take it to market and cost jobs in this country. CROWLEY: Now, I want to just tell our viewers, you're an exec vice president of Booz Allen which is involved in Internet security and makes money by offering Internet security, and there's been some criticism that you're overstating this case, that the U.S. is -- the Obama administration has made it a priority that, in fact, they are on top of this.

What makes you feel that they aren't?

MCCONNELL: Just look at the McAfee report.

Now I still maintain clearances. I became concerned about this issue when I served as the director of the National Security Agency in the early '90s in the Clinton administration. I felt then I had a responsibility to continue to remind senior officials just how severe this is.

I had the opportunity serving as the DNI to have a discussion with President Bush and later President elect, now President Obama. Each of them realized the severity of this issue.

Now this administration has done many good things. They have an international policy, they've sent legislation to the congress for consideration. But it's not nearly enough. It has to be significantly more enhanced than it is because as a nation, we are vulnerable.

Let me give you two examples. A terrorist group that had cyber skills could attack the critical infrastructure of this country, particularly in the heat of summer or the cold of winter and cause chaos. It could disrupt banking, electric power.

CROWLEY: It could shut down power grids.

MCCONNELL: Indeed. And remember there was a blackout in about 2003 in the northeast. We were without power for several days. And it put us on the brink of chaos. It's possible for a relatively small group to be able to do that to the country today.

Now, if you go to cyber war where we were mad at someone, we were exchanging hostilities in some way, some of these nation states have penetrated our systems, not only to gain information advantage, but to leave capability that can be used...

CROWLEY: Later on.

MCCONNELL: Later on when there's a crisis of some sort.

So at one level we're losing our economic advantage of our innovation engine. And at another level, we haven't adequately addressed the potential for a terrorist group, someone that would not be deterred from inflicting major damage on what I call the soft underbelly of the country.

CROWLEY: Admiral Mike McConnell, thank you so much coming on. Scary stuff. I imagine this will come up again. Thank you for being with us.

MCCONNELL: Thank you.

CROWLEY: Up next, a check of today's top stories, then Fareed Zakaria GPS at the top of the hour.

(COMMERCIAL BREAK)

CROWLEY: Time for a check of today's top stories.

We're expecting a verdict soon in the trial of two U.S. hikers accused by Iran of spying. Josh Fattal and Shane Bauer have been in prison for two years after allegedly crossing Iran's border with Iraq last Sunday. Their lawyer said the courts would issue a verdict within a week.

At least 26 police officers injured, 42 people arrested after violent protests in North London. Demonstrators hurled objects and set police cars and buildings overnight to protest the death of a man allegedly shot by police.

Four NATO soldiers were killed in eastern and southern Afghanistan today in two separate insurgent attacks. Meanwhile, NATO recovery teams searched the wreckage of downed military plane that left 30 U.S. service men dead. Among those killed with Navy SEAL Aaron Carson Vaughn. His grandmother said Vaughn was a great American who was willing to give his life for his family and country.

And those are today's top stories. Thank you so much for watching State of the Union. I'm Candy Crowley in Washington. A program note, next Sunday's State of the Union will be reporting from the campaign trial. I'll be in Iowa covering the Ames straw poll, the first real test for Republican presidential candidates. That's next Sunday, 9:00 am Eastern.

Up next for our viewers here in the U.S., "Fareed Zakaria GPS."