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FAREED ZAKARIA GPS

Interview with Martin Wolf; Interview with Howard Schultz; The Beginning of a Great Reversal?

Aired October 9, 2011 - 10:00   ET

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


FAREED ZAKARIA, HOST: This is GPS, THE GLOBAL PUBLIC SQUARE. Welcome to all of our viewers in the United States and around the world. I'm Fareed Zakaria.

We have a really important show for you today. We're going to take an in-depth look at the U.S. economy from four crucial angles.

First up, the big picture, and it's scary, from Martin Wolf of "The Financial Times."

Then, a snapshot of the American economy from Starbucks chairman and CEO Howard Schultz.

Next up, the U.S. economy's breaking point. Where are we weakest? That's what the author of "Moneyball" and "The Blind Side," Michael Lewis, will give me his insights on.

And finally, solutions. What will fix the problems that ail us? I'll talk to Tom Friedman of "The New York Times" about his new book.

Also, want to see the hottest new things on the globe? Take a trip to Mumbai or Shanghai. I'll explain.

And, of course, a few thoughts on Steve Jobs.

But first, here's my take. Barack Obama has apparently committed blasphemy. In an interview in Florida last week, he dared to say that America had gotten soft. The denunciations came in fast and furious.

(BEGIN VIDEO CLIP)

GOV. RICK PERRY (R), PRESIDENTIAL CANDIDATE: The American people are plenty tough. What we've got is a soft president.

MITT ROMNEY (R), PRESIDENTIAL CANDIDATE: It is not that we have become soft, it's that he's on our shoulders, and he's too heavy.

(END VIDEO CLIP)

ZAKARIA: Now, if you watch the clip, here's what the president actually said.

(BEGIN VIDEO CLIP) BARACK OBAMA, PRESIDENT OF THE UNITED STATES: But the way I think about it is, you know, this is a - you know, a great, great country that had gotten a little soft, and, you know, we didn't have that same competitive edge that we needed over the last couple of decades. We need to get back on track.

(END VIDEO CLIP)

ZAKARIA: Isn't this self evidently true? And isn't this what conservatives have been saying for decades?

The evidence on the topic is pretty clear. The United States is slipping by most measures of global competitiveness. In category after category, actual venture capital funding, research and development, America has dropped well behind countries like Japan, South Korea, and Sweden.

The Information Technology and Innovation Foundation measures 39 countries on their efforts to improve competitiveness over the last decade. America comes in next to last.

Perhaps the most crucial measure of our ability to compete in a global economy is our educational level, especially in science, math, and engineering. A generation ago, America had the highest percent of college graduates in the world. Today, we are ninth and falling.

In 2004, only six percent of U.S. degrees were awarded in engineering, which is half the average for rich countries. In Japan, it's 20 percent. In Germany, it's 16 percent.

The great scholar Daniel Bell once summed up the essence of the Protestant ethic that spawned industrial civilization in the west - delayed gratification. The ability to save and invest today for a better tomorrow. That's been at the heart of every society's leap from poverty to plenty. And America was a country marked by this ethic.

Let me give you three examples. In the 1950s, household debt in America was just 34 percent of our disposable income. Today, it is 115 percent of disposable income. We're all maxed out on credit cards.

Over the same period, investment in infrastructure and R&D spending are both down by a full percent of GDP. Today, the federal government spends $4 on every adult over 65 compared with $1 for every child under 18. Every level of government now spends less money investing for the future and more fueling consumption for the present.

Conservatives used to believe in confronting hard truths, not succumbing to comforting fairy tales. Some still do. In a bracing essay in the right wing "National Review," Peter Thiel, the co-founder of Paypal and the politically active "Libertarian" describes quite well how America has, well, gone soft. He notes that the economy hasn't been performing well for decades, that median wages have been stagnating. He argues that the country's innovation culture has begun to decay, corroded by a widespread search for easy progress and quick fixes.

"In our hearts and minds," Thiel writes, "we know that desperate optimism will not save us." That's what the feel-good mantras you hear so often these days sound like - desperate optimism.

For more on this, read my column in this week's "Time" magazine or at Time.com, and let's get started.

(BEGIN VIDEOTAPE)

ZAKARIA: We begin with the macro view from one of the world's great economic observers. Martin Wolf is the chief economics commentator for "The Financial Times."

Martin, does it appear to you that there is any danger that the United States could fall into a double-dip recession?

MARTIN WOLF, CHIEF ECONOMICS COMMENTATOR, FINANCIAL TIMES: Well, the answer I like to give to that is you can't really get into a double dip because it never really got out of the first recession. Properly understood, this is true for the U.S. and really all the other major developed countries, except Canada. Their output in the most recent quarter is still at or below where it was before the crisis started in 2008. They've never made a proper recovery.

Now, the question is, could they start bouncing back down further, even further below the starting point over the next year or two? Yes, that's perfectly possible, in which case the slump-like condition, which is what I think of it now, could continue for many more years.

ZAKARIA: And what gets us out of it? Is it - is it - I mean, fundamentally? The average American keeps raising his savings rate. The American savings rate is back up to - it's up to about five percent now from zero or negative one.

And is the feeling - do you feel that probably what you're going to see is, you know, American consumers being extra cautious and, if you will, overshooting on the upside, saying, well, I'm not going to spend again until I get my savings rate up to six, seven, eight percent?

WOLF: Obviously policymakers have to stop making mistakes. They have to stop doing things that shakes people's confidence - that shake people's confidence, and make them feel that things aren't going to be managed in at least a moderately competent way on both sides of the Atlantic, but of course including the United States. That's very, very important.

Second, I believe that we have to accept that this - there is going to be this very long-term process of healing as housing markets stabilize; investment in housing stops falling, this affects both sides of the Atlantic; unemployment finally really stabilizes; and while the household's finances are cured. We have to accept that.

And, while that is happening, there has to be a commitment to very strong policy support, however unpopular and risky it is. That means very aggressive monetary policy, very aggressive fiscal policy.

ZAKARIA: So let's just unpack (ph) what you said, Martin. You think the government should be doing more to create jobs, building infrastructure, providing tax credits to corporations for investment, and you think the Federal Reserve should be doing more of the kinds of things it's been doing. For example, this latest - this latest bout of further trying to lower interest rates.

But, you realize, this is all very unpopular in the United States right now.

WOLF: I - I agree. This is an incredibly controversial set of issues. I have personally absolutely no doubt that's what government should be doing. I think we in the west are making the mistake that the Japanese made in about '97, tightening too soon; the mistake that Roosevelt famously made in 1937 in the U.S.

We are tightening before the private sector has healed, before the private sector is willing to spend. And I - I know this is an incredibly controversial view, but it seems to me simple common sense. You've got an extremely deflationary recessionary backdrop.

I don't know whether the opponent of - of stimulus are actually wanting the economy to contract. I wouldn't suggest that. But it seems to me an inevitable consequence of that.

So I think the ideas that the president - your president put forward for his recent jobs package made lots of sense to me. I just think it's too small.

ZAKARIA: What do you think the lessons from Britain are? Because Britain looked at its situation and decided that it had to create confidence in the markets, it had to engage in tightening, fiscal tightening, it - it cut its budget deficit, and it has had the effect of creating confidence in the bond markets. Britain certainly has the highest credit rating of any European country.

But what has been the effect on the economy?

WOLF: I accept that we needed some such plan, but it - it was far too ambitious and far too inflexible, and the effect on the economy is quite clear. The economy stopped growing, completely. It's utterly stagnant.

But there's - it seems to me quite unambiguous. The lesson of the British experience is that against exactly the same sort of backdrop, very cautious private sector, very weak housing market, very - very, very high savings in the private sector. The government has to be willing to spend, and as the - as the government is cutting its deficits, the economy has basically become completely stagnant, and that's exactly what I predicted, and that's where we are.

And I do hope the U.S. doesn't follow this example because, for the world, the U.S. matters so much more. We - Britain makes a mistake, everybody can live with it. But if the United States goes back into a serious recession, which is something I really worry about, the effect on the whole world and the confidence in the U.S. economy and in the western economies will be really very badly damaged.

This is not some trivial sort of small local thing. It is a global significance if the U.S. does this.

ZAKARIA: Martin Wolf, always a pleasure to have your insights. I wish you were more optimistic. Maybe we'll - maybe that will happen the next time.

WOLF: I wish I were, too.

ZAKARIA: And we will be back.

(END VIDEOTAPE)

(BEGIN VIDEO CLIP)

HOWARD SCHULTZ, CHAIRMAN AND CEO, STARBUCKS: If this was a company, if this was a business, the business would be bankrupt.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

ZAKARIA: So just what would a snapshot of the U.S. economy taken this week look like? My next guest has a fascinating perspective on that. He has more than 11,000 data points. That is how many cafes Starbucks has in this country.

My next guest is the coffee chain's CEO and chairman, Howard Schultz. So, thank you for being on.

SCHULTZ: Oh, it's my pleasure. Thank you.

ZAKARIA: When you look around and you're getting this data from everywhere, do you agree with Ben Bernanke who said this week that he thinks that the second quarter is going to be better than - the second half of the year is going to be better than - than the first half, that things are picking up?

SCHULTZ: I'm not sure I agree with Mr. Bernanke, but I would say the economy is somewhat bifurcated. On one hand you've got nine percent unemployment and significant pressure on consumer confidence. On the other side, Starbucks is having its best year, and I think there is spending based on luxury products, affordable luxury, and there's two consumers.

My concern in term of Mr. Bernanke's comments is just the crisis of confidence that exists as a result of dysfunctionality in Washington that is creating a cloud over the country and, as a result of that, my confidence in the second half of the year is not as - as strong as what he would suggest. ZAKARIA: When you talk about the crisis of confidence, do you think that consumers are not spending money because they are shell- shocked from all the debt they have, because their houses and their mortgages may be underwater? Or do you really think it's - it's beyond that, and it's about this political climate in Washington?

SCHULTZ: I don't think that there is a silver bullet to define why customers are not spending or there is a level of no confidence in the country. Having said that, I think if you would track the crisis of confidence after the debt ceiling debacle, I think you'd see that there is a straight line in terms of what is happening in America.

Americans reading the paper, listening to the news every single day, and all you hear is things are getting worse and worse. And that has a psychological effect on consumer confidence. That's what consumer confidence is.

And then you have companies across the board that are sitting with $2 trillion, $3 trillion of cash on the balance sheet and not spending as a result of the fact that they have no confidence in the direction of the country. So this is - the connective tissue of all this is a - a swirl, and the swirl, unfortunately, is pessimistic.

ZAKARIA: The way you describe it, it feels as though it's a little bit of a pox on both your houses. But there are two distinctly different approaches here.

The president is out there with a jobs plan which is basically unemployment insurance extensions, tax breaks, cuts in the payroll tax, an infrastructure bill too modest for my - for my taste, but still, it's something. On the Republican side, you have people saying what you need more than anything else is to cut the - cut government spending, cut the deficit.

Which of them would you prefer to see?

SCHULTZ: Well, I - I don't think it's one versus the other. I think what you just described is the problem. It's not one versus the other. It is we need cooperation, and we need co-authorship. We need a combination of both.

Let - let me take a different tact, if I can. In the mid - mid- 1940s, something was created. It was significant, it was innovative, it was bold, and it was courageous. It was the Marshall Plan.

Now, let's take a step back. Can you imagine the situation today where the Marshall Plan would have any opportunity whatsoever in this existing political climate to succeed? And the answer unequivocally is no.

I would suggest that our problems domestically are as great as the problems were when the Marshall Plan and President Truman convinced America and a Republican Congress this was the right thing to do. We need a domestic agenda, and we need a forcing function that addresses the significant problems, and, as Tom Friedman said in his book, we need truth-telling once and for all. Tell us the truth. We don't have a $14 trillion deficit, it's $47 trillion. And it's things like that. Unemployment in America is not 9.1 percent when you're African-American, you're Hispanic. There's no access to credit for small businesses.

ZAKARIA: You were a big supporter of President Obama. You were a supporter of Obamacare.

SCHULTZ: Yes.

ZAKARIA: Is this - does this suggest a kind of deep disappointment with the president?

SCHULTZ: I'm not here to - to in any way criticize the president or any members of Congress or any party. I'm a registered Democrat, but I'm an American. I'm deeply concerned. I'm profoundly disappointed with the direction the company - the country is going.

And the president is my president. I want him to succeed.

ZAKARIA: But what do you want him to do? Suppose you had him - assuming you've had these opportunities -

SCHULTZ: I - we need -

(CROSSTALK)

ZAKARIA: What would you tell him to do?

SCHULTZ: I think we need political courage and - political courage and will right now. We need big, bold ideas. We're not going to solve these problems incrementally by putting Band-Aids on things.

If this was a company, if this was a business, the business would be bankrupt. And you would have to do drastic things to override the system.

We need transformation, and - and that transformation comes from leadership. We're in a crisis. We need decisiveness.

I - I want to say something. I know I'll be criticized for this. I don't think this is that hard. I don't. What's hard is when you get people in a room who have ideology and re-election and polling and the elephant in the room is not the problem, it's self-interest.

If this was a business and you had like-minded people whose left their ego at the door to try and solve the problem, we would solve these problems.

ZAKARIA: But you - you want to defund politicians, right? You have - you were -

SCHULTZ: I do want to defund them. Yes.

ZAKARIA: You made - you made this appeal that you want people to withhold campaign contributions. SCHULTZ: Correct.

ZAKARIA: What do you hope to achieve?

SCHULTZ: I want to suspend contributions because I don't believe that writing a check based on a $4 billion election cycle in 2008 and an estimated $5.5 billion in 2012 is what we should be doing. Instead, I want to send this powerful signal to Washington that I and other like-minded CEOs now, 150 of us, are dissatisfied with the status quo, and we are begging you to understand that we need solutions to significant problems.

And I also think businesses and corporations - and this is where I feel differently than some of my brethren - we have a deep responsibility, as well, and we have to do our part. We have to invest in the economy, and we have to create a sense of optimism that we still believe in America.

America's best days are ahead of us, and we believe that investing in America despite the landscape and all the information is still the right thing to do.

ZAKARIA: Howard Schultz, a pleasure to have you on.

SCHULTZ: Thank you very much.

ZAKARIA: And we will be back.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

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

Going to the movies is a great American pastime.

(BEGIN VIDEOTAPE)

ZAKARIA (voice-over): And whether it's "Kung Fu Panda" or "Harry Potter" -

CROWD: Harry! Harry! Harry!

ZAKARIA: There's always some extra cache in catching the films as soon as they're released.

So if you're a "Mission Impossible" fan, you know that the latest installment of Tom Cruise's action series is opening soon.

But if you want to be there for the first day, first show, don't go to Los Angeles to watch the world premiere in Hollywood. Try New Delhi or Mumbai. You see, "Ghost Protocol" releases across India five days before it hits U.S. cinemas.

And it's not an isolated case. Steven Spielberg's film adaptation of the comic book series "Tintin" - TINTIN: It may sound crazy, but I've got a plan -

(END VIDEOTAPE)

ZAKARIA: -- opens in Asia and the Middle East more than a month before it hits American cinemas.

Now, we are all used to a world in which events, ideas, and products start in the West and move East. Is this the beginning of the Great Reversal? Well, maybe.

(BEGIN VIDEOTAPE)

ZAKARIA (voice-over): Partly this is happening so companies can avoid piracy in Asian countries. Earlier, when movies would arrive in Chinese or Indian cinemas two months late, many fans there would have resorted to pirated DVDs.

But there's also a major economic trend here that big companies are picking up on. Overall, U.S. consumer spending declined by two percent in 2010. The sector that declined the most was entertainment, by seven percent. It makes sense, when times are tough, you can't cut back that much on essentials like food and housing, so you spend less on things like movies and music.

Meanwhile, Indians, for example, are moving in exactly the opposite direction. Consumer spending is up in general, but on entertainment, it is up 14 percent in 2010. Emerging economies, including China and India, account for half of global output, but only a third of global consumption. This is changing, and it's not just the movie companies that have figured this out.

When Dell launched its new ultra thin laptop last week, it made China its first stop. The XPS 14z is being marketed as the world's thinnest laptop, but you wouldn't be able to buy it in the U.S. yet. You have to wait. You see, China is now the world's biggest PC market, so it gets prioritized.

Look at the auto industry. The 2013 Chevy Malibu is going to launch in Korea and China before it hits dealers here in the USA, and G.M. has done that for years with a series of new Buicks.

So there is a big shift at work here, a picture of the two-speed world. Consumers in developing markets are growing in importance in the eyes of the biggest global companies. Meanwhile, here in America, consumer demand is stagnant.

Could things change? Yes, but only if we get growth going again in the West and, particularly, in America.

U.S. companies are currently holding more than $2 trillion in cash reserves.

(END VIDEO CLIP)

ZAKARIA: I saw a chart this week that illustrated in the starkest possible way why this needs to change. Take a look.

(BEGIN VIDEO CLIP)

ZAKARIA (voice-over): It plots corporate spending along with employment numbers. The correlation is unmistakable and tight. As corporate investment goes up, employment goes up.

So the question everyone in Washington should be asking is how do we get corporations to invest more and sooner, looking at permanent changes in tax and regulatory policy. Let's agree on five measures and pass them right away.

(END VIDEO CLIP)

ZAKARIA: This doesn't need to be "Mission Impossible" for America, and we don't even need Tom Cruise to fix our problems.

We'll be right back.

(BEGIN VIDEO CLIP)

MICHAEL LEWIS, AUTHOR, "BOOMERANG" AND "THE BIG SHOT": That's the problem. They - they want public services and they don't want to pay for them. They want - they want to cheat the future for the present, and that's a - that is not just - that's not a financial problem, that's a cultural/moral problem.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

CANDY CROWLEY, CNN SENIOR POLITICAL CORRESPONDENT: Time for a check of today's top stories.

The leaders of Europe's two biggest economies are meeting today about Europe's financial crisis. The meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy comes amid fears that Greece will default on at least some of its debts. That would put more pressure on the euro, the currency used by 17 European countries.

Fighters loyal to Libya's new government say they're nearly in control of Moammar Gadhafi's hometown of Sirte. A field commander says a hospital in the city is one of the few places still holding out with Gadhafi loyalists.

And harsh words today from Syria's foreign minister to countries that appear unsympathetic to his government. Walid al-Moallem says Syria will take strong measures against any country that recognizes an opposition council that's being formed in Turkey.

New York Mayor Michael Bloomberg says the "Occupy Wall Street" protesters could destroy the jobs of working people. The "Occupy" protests are now taking place in more than a dozen cities.

Those are your top stories. Now back to FAREED ZAKARIA GPS. (BEGIN VIDEOTAPE)

ZAKARIA: Michael Lewis is a storyteller extraordinaire. Unfortunately for many of the characters, the stories he tells are non-fiction. And in his new book, "Boomerang," he's on a world tour of the world's disaster zone - financial disasters, that is. Among his stops, Iceland, Ireland, and Greece.

But now he's setting his sights closer to home, in fact at home. Lewis says his home State of California and others like it face the nightmare scenario.

Welcome, Michael Lewis.

LEWIS: Thanks for having me back.

ZAKARIA: So when you look at all these countries like Greece, Ireland, there's something you said or you write about that the cause of their problems was the same. Essentially too much cheap credit, too much easy - easy money, but the consequences were different. Why?

LEWIS: Well, this is absolutely right. The cause was the temptation of free money. That the banks ceased to do credit analysis. They became numb of the risk.

So once that happened, a lot of people could borrow money who shouldn't be able to borrow money. So the temptation gets created. And the cultures responded - the societies responded to the temptation in very different ways. And I think the answer to that is they're very different places.

ZAKARIA: So let's talk about the cultural consequences of this - of this easy credit. When you look at America, what does - what did we do with the easy money that reflects our national character?

LEWIS: You know, it's - there are two - there are two obvious sorts of events that are tied to the credit bubble. One is the way Wall Street went crazy. The way Wall Street basically systematically set about disguising what it was supposed to be revealing. Disguising risk rather than revealing risk. And - but the - and the way the financial sector basically abused the rest of society in a lot of ways.

But the other - the other thing that was - that was a by product of the easy money was the way public employee unions abused the - the governments they work for, in what my State of California is the perfect example. Public safety workers could cut deals with cities across the State of California and they're going to bankrupt the cities. Their deals that can never be fulfilled.

And if you look at the behavior, the patterns of behavior in American life, the patterns of behavior reflect this very - really almost sensational ability to ignore long-term considerations and long-term interests for the sake of the short term. I think that short termism is what is the thing that is most revealed by what we've gone through. That we have not - we've forgotten - we've forgotten about the long term.

ZAKARIA: You're absolutely right. When reading your - your kind of California, it's the politicians who are willing to make all these promises to state employees, but the cost of which are pushed off because it's pension and health care stuff which wouldn't show up on the books for two decades.

LEWIS: The future is undervalued. In all the - in all the calculations, the future is undervalued. And I think this notion alive in the land that we're just being misled. That that the problem is politicians.

ZAKARIA: Yes.

LEWIS: I think we get the democracy we deserve. And in California it's very hard to argue otherwise. We have essentially direct democracy. All big fiscal decisions are made by the people by plebiscite.

And the idea that somehow in that system that people aren't getting what they want - they are getting what they want, that's the problem. They want public services and they don't want to pay for them. They want to - they want to cheat the future for the present. And that's a - that is not just - that's not a financial problem. That's a cultural/moral problem.

ZAKARIA: So when you look at it, what you're describing in both Europe and the United States really, is the problem for democracy to impose any kind of short-term pain for long-term gain.

LEWIS: Right.

ZAKARIA: The kind of classic principle of the - of the gym, of the fitness club, right? Which is your no pain, no gain.

So how do you make it happen? I mean, is there - is there a path out for democracies?

LEWIS: I hate to say this, but what I think happens is the only way - the only way pain gets in - that solutions that are slightly painful get imposed are in times of great crisis. So I think the - a crisis is necessary in order for change to occur.

ZAKARIA: Didn't we - didn't we just have one?

LEWIS: Well, we had one. But what did we do? We took - we took morphine. And we essentially injected -

ZAKARIA: More easy money.

LEWIS: Yes. We did - we did what we could to avoid the pain. And so I think that's what happens. We just get to a bigger crisis. And that's what this story is about. It is -- it's a companion volume to the big short. It's saying that we are still in the same financial crisis because we didn't actually deal with it. What we did was we essentially nationalized our problems across the world. And now the question is are governments credible. The question before was, are the banks credible. The banks are now backed by the governments, so are the governments credible. At some point you get to an end game. And I think that's kind of what we're seeing. I mean, it's going to take years to play out, I bet.

ZAKARIA: But do you think the end game will take place at the local level in America?

LEWIS: In America I do. And I'll tell you why. Because the way the end game plays out financially, you can see it in Europe.

That what happens is a country gets itself into actual fiscal trouble. And the markets get scared and the market raise the interest rates they charge the country, which exacerbates the fiscal trouble. And then you get the vicious spiral and you never get out and that's what Greece is in right now. I mean, if they had to go borrow money in the open markets, they'd be paying 70 percent. They can't afford that.

Here the markets are telling us what's going to happen. The U.S. Treasury gets downgraded by Standard and Poor's and you would think the treasury bonds would fall. That people would demand a greater rate of interest from U.S. - from the U.S. Treasury to lend it money.

Instead, people panic and they buy U.S. treasuries because they are still relatively the most risk less thing. And it a fight to safety goes to treasuries. That tells you that at the federal level we're going to be able to finance ourselves probably for a while no matter how badly we behave. That it's going to take a while before we enter a vicious cycle. I mean, decade.

But at the local level, all it takes is a single Wall Street analyst to go on "60 minutes." Meredith Whitney did this. For a few minutes and suggest there might be some defaults. And there is a stampede out of municipal bonds and the - and the rate of interest charged to municipalities goes through the roof.

So the way the European sort of vicious cycle reprises itself in America is at the level of local finance. I think that's right.

ZAKARIA: Well, on that cheery note, Michael Lewis, thank you very much. "Boomerang" and of course "Money Ball" in theaters everywhere. We will be back.

(END VIDEOTAPE)

(BEGIN VIDEO CLIP)

TOM FRIEDMAN, COLUMNIST, NEW YORK TIMES: Don't tell me we're going to get out of here with just hocus-pocus and - give me the truth. People want to know is what's (ph) the scale of the problem.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

ZAKARIA: Tom Friedman, the Pulitzer Prize-winning columnist for "The New York Times" spends a lot of time thinking about America's problems and solutions to those problems. He joins me now.

Thanks for joining me, Tom.

FRIEDMAN: Great to be here, Fareed.

ZAKARIA: Tom, you have a new book, "That Used to Be Us." And the phrase comes from something Obama said and I think so many people feel that way when you read about the biggest bridge, the tallest building. You know, I began my book with a similar idea that you - all the stuff used to be American.

And now we sort of take it for granted that we're not going to build the biggest bridge. Again, we can't even repair the Washington Subway elevators. Tell that story about the Washington Subway.

FRIEDMAN: Well, I had come back from a conference in Tianjin, China, which is at this amazing Conference Center with multiple escalators in every corner, huge ones. And I came back to Bethesda, Maryland, where I live, and called Michael. My co-author, Michael Mandelbaum, his wife got online and I was telling his wife about this conference. And she said, have you been to our subway stop lately because both escalators have been under repair for six months. And, you know, basically, you know -

ZAKARIA: Which is as long as it had taken roughly to build the entire conference center in China.

FRIEDMAN: Actually, yes. Almost the exact same amount of time China took to build a conference center was taking us to repair two escalators with 21 stairs each.

And our book is not about China, Fareed, you know? As you know, it's really it's about America. And we firmly believe China can succeed and we can succeed. And, by the way, China can fail and we can succeed. What China does doesn't really matter. It's not what we do and what we don't do.

You know, whenever people hear the title of the book, they'll ask Michael and me, "That Used to Be Us." Does it have a happy ending? And we always tell people, well, it does. It does. We just don't know whether it's fiction or nonfiction.

So, you know, we're - we're not falling behind China. We're not falling behind Brazil. We've gotten into the situation, Fareed, because we've gotten away from our formula for success.

The thing that got us here, this great public/private partnership that was built on five pillars - education, educating people to use whatever the technology was from the supercomputer to the cotton gin in its day, infrastructure, having the world's best infrastructure. Third, having the most open immigration policy to attract the world's most energetic and innovative, you know, immigrant. Fourth, having the best rules to incentivize capital formation and investment. And last, government-funded research to push out the boundaries of science so our entrepreneurs can pluck off the best flowers.

ZAKARIA: And why did it happen? So why did you go from a situation in the 1950s where the State of California had the best public education system in the world, K through the PhD programs through the University of Berkeley, the best highways, the best public parks, you know, the best quality of life. California with -

FRIEDMAN: Correct.

ZAKARIA: -- I remember growing up in India, California was utopia.

FRIEDMAN: That's right.

ZAKARIA: It was the future.

FRIEDMAN: Now it is again for America and in a different kind of way.

ZAKARIA: Now you look at it and California spends four times as much I believe on prisons as it does on its education budget.

FRIEDMAN: Well, you know, we gave way from that greatest generation which believed in save and invest to baby boomer generation. My generation, yours, that believed in borrow and spend. And did not have what my friend, Dov Seidman, calls the sustainable values. Do things in ways that sustain, but instead had situational values. Do whatever the situation allows.

Just do it, the Nike commercial, that's us, Fareed. I give you $1 million mortgage even though you only have $10,000 in income and it's a subprime mortgage, and all I ask is can you fog up a knife? I just do it because the situation says I can. We got into a values decline.

Secondly, we misinterpreted the end of the Cold War. We thought it was a victory. It was a great victory, of course. We thought it was a victory that meant we could put our feet up. When in fact, what it did was unleash two billion people just like us with the same aspirations to connect, collaborate and compete. OK.

And then thirdly, tragically after 9/11, we had to spend a decade chasing the losers from globalization called al Qaeda and the Taliban, rather than the winners called India, China, and Brazil.

And you put it all together and the net result is if you look at that great formula for success that got us here - education, infrastructure, immigration, rules and government-funded research, the arrow is pointing down today, Fareed, on all five.

And that's why the only way out of our problem, we keep debating this economic crisis, wherein jobs, we need jobs. Of course we need jobs, but it's not a three-year-old crisis, Fareed. It didn't start in 2008. It started 20 years ago.

And that's why I've been writing. We have a choice now. We can have a hard decade or a bad century that is either we kind of roll up our sleeves now and get back to our formula for success, which is going to take some hard work, and take some cutting because we made promises we can't keep. It's going to take taxing, because we need more revenue because it's going to take investing in that formula for success.

Either we do that over the next decade in which case I think we'll be fine. Or I think we're just going to limp into the 21st century.

ZAKARIA: How do you - how do you make the politics of that work? Because I mean, western politics and American politics the last 30 or 40 years has really been about politicians promising voters more stuff.

FRIEDMAN: Right.

ZAKARIA: More benefits, more health care, more better - you know, better pensions. If you look at the way in which local politicians get elected is they promise state employees fatter and fatter pensions and health care, which busts the budget but not that year -- in the out years when they're out of office.

So this whole mechanism by which politics works in this country is all about promising people stuff. Everything you're talking about is taking stuff away.

FRIEDMAN: That's right.

ZAKARIA: Reducing benefits, raising taxes. Because all of this is getting the situation back under control.

FRIEDMAN: Right. Can we do that in a democratic system? I don't know. I think - I hope we test it, though, Fareed. OK. I think that - well, if we don't, you see, the market or Mother Nature's going to do it for us basically.

And, you know, when we do it, when we make the reforms ourselves, that's like going to a dentist. You have Novocaine, he takes out your rotten tooth. When the market does it, it's like having a caveman do your dental work with stone tools. The tooth will come out. OK. And so the market will adjust here. OK. But there will be blood all over the floor and a few other teeth will come out, too. So we're going to eventually have to decide because if we don't do it, the market will do it for us.

Now, what we argue in the book is that basically, look, you know, I think it's unfortunate the president is going down this track of attacking millionaires and whatnot. Look, millionaires should pay their taxes just like everybody else. And I don't think that's the way, Fareed.

I think the only way to do it is with a program, OK, for basically cutting, taxing and investing, that has the following components - first of all, people have to believe it's at the scale of the problem. Don't tell me we're going to get out of here with this hocus-pocus. Give me the truth. People want to know is what's (ph) the scale of the problem.

Two, they have to believe that it's politically androgynous. That it takes the best Republican ideas and Democratic ideas. Three, they have to believe it's fair. Everybody's going to pay. The millionaires are going to pay, but everyone's going to pay something.

We're all in this together and we all got in this together. And just because you make $250,000 or $244,000 or $251,000 or $50,000 or $20,000, everybody should pay something. Everyone contributed to World War II. Everyone's got to dig out of this hole.

And lastly, Fareed, in my view, it needs to be aspirational. Where's the aspiration? It's about making us great. Keeping us great. And to me the aspirational message for the president is it's obvious. We think what Cape Canaveral was to America in the 1960s, America should be to the world today.

What was Cape Canaveral? It's a place we launched our moon shots. Well, it's a different world now. We're not going to get to the next plateau by launching one moon shot anymore. We're going to get there by becoming the platform where everyone in the world wants to come and launch their moon shot.

That's our vision for America that we identify ourselves as the place where everyone comes to start something, create something, collaborate with something, heal something. That's how you get people to come here to start things. And if people start things, enough things here, then the butcher, the baker, and the candlestick maker will all have work, too.

But if we don't do that, if we sit around saying I'm going to take it out of your hide, you know, or you've got more than me, I'll take it out of his hide, it's not aspirational, it's not at the scale of the problem. It wouldn't work, and we'll limp into the 21st century.

ZAKARIA: Tom Friedman, always a pleasure.

FRIEDMAN: Thank you, Fareed.

ZAKARIA: And we will be back.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

ZAKARIA: The big news this week, of course, Steve Jobs' death. And I will offer my two cents about it in a moment.

But first, a question about him for our "GPS Challenge Question." What was Steve Jobs' first job after dropping out of college? A) video game designer; B) pizza maker; C) typesetter; D) apple picker.

Stay tuned and we'll tell you the correct answer. Make sure you go to CNN.com/GPS for 10 more questions. And while you're there, check out our website, the Global Public Square. You'll find smart interviews, essays, takes by some of our favorite experts. Don't forget, you can follow us on Twitter and Facebook.

This week's book is actually a magazine. Make sure you pick up "Time" Magazine this week which has a superb cover essay by Walter Isaacson. Having written prize-winning biographies of Henry Kissinger and Albert Einstein, Isaacson has just finished a biography of Jobs with Jobs' cooperation. This week in "Time," you get a special reflective essay from Isaacson.

And now for "The Last Look." Many of you have probably seen this extraordinary speech that Steve Jobs gave at Stanford University's 2005 Commencement.

(BEGIN VIDEO CLIP)

STEVE JOBS, FORMER APPLE CEO: So you have to trust that the dots will somehow connect in your future. You have to trust in something, your gut, destiny, life, karma, whatever, because believing that the dots will connect down the road will give you the confidence to follow your heart even when it leads you off the well-worm path and that will make all the difference.

(END VIDEO CLIP)

ZAKARIA: For my money, it's the best commencement speech I've ever read or watched. It has always struck me as so simple and yet so profound.

And the reason is I think that we live in a culture that so venerates success. People write books about it. Everyone tries to learn from it. But the essence of Steve Jobs' address was that he learned from failure. The talk is about three failures - dropping out of college, getting fired, and being diagnosed with cancer. And how he was able to give his life meaning, purpose and richness as a consequence.

(BEGIN VIDEO CLIP)

JOBS: Sometimes life's going to hit you in the head with a brick. Don't lose faith. I'm convinced that the only thing that kept me going was that I loved what I did. You've got to find what you love.

(END VIDEO CLIP)

ZAKARIA: Everyone tries to copy and learn from success. It takes a very special person to learn from failure.

If you haven't watched the address, go to our website. The correct answer to our "GPS Challenge Question" was A, Jobs' first real job was designing video games at Atari where he and Steve Wozniak worked on the classic game "Breakout." Remember that game? Go to our website for more.

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

Stay tuned for "RELIABLE SOURCES."