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Economic Panel; Interview with Steve Rattner; Interview with Anne Applebaum

Aired December 23, 2012 - 10:00   ET


FAREED ZAKARIA, HOST: This is GPS, the Global Public Square. Welcome to all of you in the United States and around the world. I'm Fareed Zakaria.

On the show today, we're going to move past the fiscal cliff and talk about the real challenges to the economy. I will talk to the chief economic advisor of the Romney campaign, Glen Hubbard, and President Obama's former budget czar Peter Orszag, among others.

Also, let me tell you about the biggest success story in Latin America. It is not Brazil. It's actually much closer to home.

Then, as the world watches the Arab world struggle with democracy, we'll take a look at the problem from an unusual perspective, upside-down. How does a country turn away from democracy as Eastern Europe did 50 years ago? I'll talk to Pulitzer Prize- winning historian, Anne Applebaum.

And we focus on decision-making. In the depths of the financial crisis, the Obama administration had an almost impossible choice, save Chrysler by injecting billions of taxpayer dollars or let it fail and lose perhaps a million jobs. Car Czar Steve Rattner gives us a fascinating inside look.

For viewers in the United States, we have a special tonight at 8:00 and 11:00 p.m. Eastern and Pacific called, "Tough Decisions." But first, here's my take.

Announcing that he would send proposals on reducing gun violence in America to Congress, President Obama this week mentioned a number of sensible gun-control measures.

But he also paid homage to the Washington conventional wisdom about the many and varied causes of this calamity, from mental health issues to school safety. His spokesman, Jay Carney, had said earlier that this is "A complex problem that will require a complex solution." Gun control, Carney added, "Is far from the only answer."

Let me respectively disagree. The problem is not complex and the solution is blindingly obvious. There are three sets of causes that people point to when talking about events such as the Newtown; first, the psychology of the killer; second, the environment of violence in our popular culture; and, third, the easy access to guns.

Each of these might explain any single event, but what we should be trying to understand is not one single event but why we have so many of them.

Let's look at the facts. According to the U.N.'s Office on Drugs and Crime, the U.S. gun homicide rate is 30 times that of France or Australia. It is 12 times higher than the average for other developed countries. Why is that?

If psychology is the main course, we should see that we have 12 times as many psychologically disturbed people as the OECD average. We don't. In fact, America takes mental disorders seriously, treats them and doesn't stigmatize them. WE do better in this area than most of our peers.

Is America's popular culture much worse than other rich countries? Not really since it's largely the same popular culture worldwide. England and Wales, for example, are exposed to virtually identical cultural influences as in the U.S. Yet their rate of gun homicide is some 3 percent of ours.

The Japanese are at the cutting edge of the world of video games. Yet the U.N. puts their gun homicide rate is close to zero. Why? Well, they have one of the most restrictive series of gun laws in the world.

When looking internationally, it is obvious that the one feature of America that would explain why we have so much more gun violence than the rest of the world is that we have incredibly permissive laws allowing the sale and possession of guns. With 5 percent of the world's population, we have 50 percent of the world's guns.

We also have evidence that tightening laws even in highly individualistic countries with long traditions of gun ownership can and does reduce gun violence.

In Australia, after a 1996 ban on all automatic and semiautomatic weapons; a real ban, not like the one we did in 1994 which had 600- plus exceptions. After that ban, gun-related homicides dropped by 59 percent over the next decade.

All the evidence points in the same direction, there will always be evil or disturbed people and they might be influenced by some element of violent popular culture.

But how is the government going to identify the darkest thoughts in people's minds before they do anything. What government can do easily, however, is make it much harder for these people to have access to guns.

A few hours before the Newtown murders, a man entered a school in Henan province in China. Obviously mentally disturbed, he tried to kill children as he could. But all he had access to was a knife. The result, despite many injured, not one child died.

The problems that produced the Newtown massacre are not complex, nor are the solutions. We do not lack for answers. What we lack in America today is courage.

For more on this, take a look at my Washington Post column. You'll find it on Let's get started.

So let's get right to it, a conversation about the real economic problems this country faces. On my right and on the right, Glenn Hubbard, the former chief economic advisor of the Romney campaign and he dean of the Columbia Business School.

On my left and sort of the left, Peter Orszag, President Obama's former budget director, and sort of in the middle, Zanny Minton Beddoes, the Economist's economics editor, and Chrystia Freeland, the editor of Thomson Reuters Digital.

Zanny, I promise we were going to get past the cliff, but I have to ask a few questions about it. Just this, you don't think that it's that big a deal if we go fall -- go over the cliff.

ZANNY MINTON BEDDOES, ECONOMICS EDITOR, THE ECONOMIST MAGAZINE: Well, I don't think it's that big of a deal if we get to January the 3rd or January the 4th and don't have an agreement, because I think we'll have one very soon thereafter.

If we did nothing for months, it would be disastrous. Not only would the combination of tax increases and spending cuts push the economy into recession, at some point the debt ceiling would be reached and presumed, at some point, the U.S. would be able to pay its bond-holders.

So that would be a catastrophe, but precisely because it would be such a catastrophe, I really don't think it's going to happen.

ZAKARIA: But, Glenn, you would agree with that, right? If we went over for a few -- a week or two, the prorated tax increases; that is the taxes going up for a week or two and spending cuts for a week or two wouldn't have much effect on the economy.

GLENN HUBBARD, FORMER CHIEF ECONOMIC ADVISOR, ROMNEY CAMPAIGN: It's not a big deal, but I think the uncertainty that is creates, as Zanny said, if that's allowed to stand, that's a problem.

Both sides actually may have agendas a little easier if we went off the cliff. Republicans could do tax reform more straight forwardly. The president could do his own version of tax policy and spending policy. But that would have to be done quickly.

ZAKARIA: And, Peter, you write that you want the discussion -- the deal to be tax hikes and entitlement reform. Do you want it to be more comprehensive than that or are those the two key elements.

PETER ORSZAG, FORMER BUDGET DIRECTOR, OBAMA ADMINISTRATION: I think, at this point, those are the two key elements because one of them is necessary to resolving the fiscal cliff. The other is necessary to getting a significant debt limit increase.

And we really need to do both. So I agree we're going to have a deal by mid to late January, at the latest. The risk in all that is it's going to be kind of a half-hearted deal.

There's an opportunity here to do a much bigger, more ambitious deal and that what I think we should be seeking.

ZAKARIA: And that deal would be tax reform plus entitlement reform or -- I mean how important do you think this whole idea of comprehensive tax reform is?

ORSZAG: I think comprehensive tax reform's desirable. It's easy to say, it's hard to do. So, in the meanwhile, it would be useful, from my perspective, to lock in some additional revenue to help on the medium term deficit.

ZAKARIA: There are people on the left like Paul Krugman who say this whole idea of comprehensive tax reform unleashing economic growth is nonsense. Is that?

ORSZAG: Most of the evidence suggests that there is some benefit from a more sensible tax code. I think, in 2013 itself, we've got larger problems in the sense of inadequate demand. But I think it's hard to argue that we want to do somewhat better with a more sensible tax code.

ZAKARIA: One piece that you've been pushing is a consumption tax as part of this comprehensive tax deal. You know that a lot of economists think it's a good idea. We should tax consumption. We'd get the savings rate up.

It seems politically dead on arrival, but I think Paul Volcker mentioned it and in response, 96 Senators passed a Sense of the Senate Resolution that this was an evil idea.

HUBBARD: Well, here's the way I think about it. We're not going to get a consumption tax in this discussion this year. And we're not going to get it next spring either.

But the reason it's inevitable is, on the Republican side, it is the way to slowly do tax reform. Peter's right. Reforming the income tax is very, very hard. It is also the only way to pay for a larger government if that's what the American people want.

MINTON BEDDOES: What really matters, I think, now that the Republicans have moved on taxes somewhat, is that we have some movement on entitlements. Not because it's necessary for next year or even the year after or even five years' time, but if you look out over a decade, two decades, that's where the U.S. really needs to do something.

And I think that's where the president has a huge opportunity. He's got movement from the Republicans. I suspect there will be movement not just on deductions, but on rates. That argument is pretty much over.

Now, show leadership on entitlements, take on, in some sense, the left of your own party, and put out something bold there.

ZAKARIA: Peter, do you worry? I mean the Democrats do seem to have suddenly circled the wagons on entitlements in a way that they hadn't a year ago that they're just -- this is going to be defended at all costs.

ORSZAG: And I think, ultimately, that will be a mistake if that's not just positioning and posturing, but is the actual underlying, you know, bottom line.

And the reason is, coming back to something Zanny said, several- fold. First, the Democrats have leverage now. They can reform these programs in a way that is progressive, that puts them on sounder long- term footing. That's a big plus.

Second, the more that you do in long-term entitlements, the less pressure on fiscal austerity in 2013, which would be harmful for the economy, and also the less pressure you're putting on discretionary spending.

So relieving some of that pressure and simultaneously not only having a massive accomplishment in terms of a legacy, but also doing so in a progressive way strikes me as win-win.

HUBBARD: (inaudible). I mean the irony is the Democrats have doubled-down on a position that says let's don't adjust the benefits of the well-off.

You know it's an irony that while we're talking about a tax debate on the well-off, the president is essentially saying don't touch the benefits of the well-off.

CHRYSTIA FREELAND, EDITOR, THOMSON REUTERS DIGITAL: No, I think that this is an easy conversation to have if in sort of geek-wonk land, but what's really interesting ...


HUBBARD: (inaudible)


FREELAND: This is "Wonkland." You might want to recall it "Wonkland." You know but what's really ...


FREELAND: I think of you as wonderfully "wonkish", Fareed. It's one of your fine qualities.

But I think what we're leaving out is how intensely politicized this debate has been. And it seems as if America has been so bruised by the fighting of the past four years and the American Democratic Party, especially the left, because I think Peter speaks for sort of American Democratic Centrists who want movement on entitlements.

But I think the left of your party is feeling right now like we won in 2012, we fought over these issues, our constituency, the middle class and the working class, are getting screwed in the U.S. economy right now and we are not going to make concessions.


FREELAND: I think that's the logic.

ZAKARIA: OK. We're going to come back and talk about exactly how the middle class are getting screwed and what we can do about when we come back.


ZAKARIA: And we are back with Glenn Hubbard, Zanny Minton Beddoes, Peter Orszag and Chrystia Freeland talking about the economy.

Glenn, when you look at it, taking off your Romney advisor hat, putting your Columbia dean hat on, what does the American economy look like to you?

There are some encouraging signs. Housing is moving. There's a -- you know, the shale gas revolution, the energy revolution and, yet, unemployment remains persistently high.

HUBBARD: Well, first, we have to focus on that. Unemployment being this high is not just an economic problem, it's a social problem. We've got to fight it.

Policy-makers need to do even more to make sure that the demand is there in the economy ...

ZAKARIA: What does mean?

HUBBARD: To me, that would be a more sensible resolution of the budget deal so that we have less austerity today, but a glide path toward more austerity in the future.

ZAKARIA: Would you be in favor of a stimulus today?

HUBBARD: I think it depends on the -- what you mean by a stimulus and in what form. But I think we have to talk about the short-term economy.

But you asked about how the U.S. looks. To me, if you looked around the world and said you can only pick one country's opportunities and problems to won, which would you want. Unquestionably, for me, it's the United States.

ZAKARIA: Would you agree with that?

HUBBARD: Think about energy. Think about tech. Think about innovation potential. Think about this country's demographics. This is the country I'd want to be.

MINTON BEDDOES: I completely agree with everything that Glenn said. And I think -- and, in fact, I'm surprise at your support for the short-term cushioning and welcome it. That's great. I think it's absolutely right.

In the short-term, the most important thing is to boost the growth rate, is to get growth up. I think a sensible, a non- Draconian, (inaudible) is an important part of that.

But I think to get to your -- to the unemployment -- the unemployment rate is absolutely the important thing. Growth is part of that. But I think that's not enough.

You know I think the U.S. has -- we can argue about whether it's structural unemployment or not, but there are a number of people, there's a cohort of people, the less-skilled people in particular, for whom they don't have the skills that are necessary in the new economy.

And if you look across the U.S. at training programs, there's a plethora of them. They're totally -- they're not very well coordinated. They don't work very well. Disability needs to be reformed.

A lot of people go onto disability and it's a kind of one-way ticket never to working again. There's a whole host of things in this sort of labor market area that I would love this country to be focusing on and I hope that once we get beyond the fiscal you can do that.

ZAKARIA: Speaking of, this is one of the big challenges, right? We have a population that is expensive and the skills are not quite where they should be. And either we're going to get the skills up or the price of labor's going to come down and we're going to get paid less and less.

When you look at this issue of training, everybody talks about it. When you were in government -- you know the Germans seem to do it pretty well. The Northern Europeans do it. Why do we -- we do spend a fair amount of money on it.

Let's say if the president were to say to you I'm going to spend three times as much money on training, on job retraining workers, do you think we know what to do?

ORSZAG: I think there's a lot that could be done. It involves education. It involves investing in infrastructure, which we should be doing. And, frankly, I think all of that's going to take time.

The best thing we could do to make up for the $750 billion a year hole in labor compensation that has arisen because of globalization and technological change, is wring as much of the waste out of health care as possible because worker's take home pay suffers by that amount.

FREELAND: I have health care written down here and that was the elephant in the room we didn't talk about when we talked about government spending right now.

And I know that Peter has worked on it really hard, but, you know, something that is really sad for me looking forward about the U.S. economy is a lot has been done, I think, even morally it's terrific that Americans are going to be covered, but the system hasn't really been rationalized and that's going to be a big drag on the U.S. economy. If I could, Fareed, I ...

ORSZAG: I'm going to counter to conventional wisdom here and say I think there is much more progress that is being made not just because of policy, but because insurance firms are pushing this way, employers are pushing this way towards moving away from fee-for- service payment, moving towards a digitized, smarter health care system.

And I am hopeful actually, more hopeful than conventional wisdom so I want to be clear about that, that by 2020, we're going to be in a much better place on health care value than we are today.

HUBBARD: I don't disagree with that.

FREELAND: I do think -- I think ...

ORSZAG: And Glenn agrees with me.

HUBBARD: I think we need some tax and insurance changes too, but I agree with that. We're moving in the right direction.

ZAKARIA: So we're at 16 1/2 percent of GDP right now, the health care spending. In 2020, where will we be?

HUBBARD: The issue is not the spending ...

ORSZAG: That's not the problem. It's getting more out of it.


HUBBARD: Exactly. We shouldn't care whether we spend 16 or 20 if we're getting great value. The question we all have is we're not getting that value.

MINTON BEDDOES: Well, if you put all of this together, than you have actually a pretty upbeat view for the economy as a whole over the next five years, right? Your shale gas, the health care improvements ...

ZAKARIA: Housing.

MINTON BEDDOES: Housing, everything. I think that's right.

ZAKARIA: Except you say in your recent -- in your last column that the demographics story is not as great as people think it is.

FREELAND: Right. Well, that is actually one of the new things that people are saying about the United States is that the U.S. has historically kind of bragged about itself compared to other western economies that, you know, here the birth rate was still really high compared to Western Europe.

And recent data shows that something really surprising has happened, which is the new immigrants, especially Hispanics who were the source of that robust fertility, have stopped having as many children and, yes, I do think medium term that's a real issue just as it is an issue for Western Europe, as it is for a lot of Asia.

That's part of the reason that this whole entitlement issue looms so large is the cohort coming into work to support the older people.


HUBBARD: (inaudible) incentives for older Americans to keep working, which we could do through Social Security reform and ...

FREELAND: And how about incentives for women to have kids?

HUBBARD: All of these are good discussions.

ZAKAIRA: That's what the French do. The Russians, I think, give you a refrigerator if you have (inaudible).



FREELAND: In France, it's actually working and, in Sweden, it's working. And it makes a different.

ZAKARIA: All right, final word, Zanny.

MINTON BEDDOES: To tie the two parts of this conversation together, this country spends ever more on old people if it doesn't reform it's entitlements.

It needs to shift that spending, I think, more to younger people and, then, all the other good things that we've talked about will come together. And I think then the future looks pretty rosy.

FREELAND: Martin Wolf's suggestion is that parents should get a half-vote for each child under 18.


ZAKARIA: I think that and the consumption tax are not going to happen. Glenn Hubbard, Zanny Minton Beddoes, Peter Orszag, Chrystia Freeland, thank you very much for joining us.

Up next, What in the World. A grand bargain of sorts, it is in North America, but not in the United States. Details right after this.


ZAKARIA: Last week, the president told a newspaper the solution to partisanship is politics and more politics. That's how you work toward the building of agreements.

Unfortunately, it wasn't Barack Obama. It was Mexico's Enrique Pena Nieto. As Washington has mired in gridlock this year, consider what's happening just across the border. One of the first things Pena Nieto did after assuming office just weeks ago was to announce a pact for Mexico, an ambitious set of reforms to raise taxes, increase competition, take on the teachers' unions.

Now, it's one thing to announce a plan, quite another to get support for it and President Pena Nieto's pact comes with endorsements from across the spectrum, the conservatives he ousted from office as well as the leftist Democrats.

While the world has gotten used to a torrent of images and news of drug-related violence from Mexico, another side of this country has been quietly developing.

Consider the facts, Mexico's GDP is expected to grow by nearly 4 percent this year, twice as fast as Brazil or, for that matter, the United States.

It is riding a manufacturing boom. Mexico is now the world's fourth biggest producer of cars, according to the World Trade Atlas. Starting next year, new taxis in New York City will carry a "made in Mexico' label."

Mexico is also the world's top exporter of flat screen TVs. In fact, Mexico exports more manufactured products than all the other countries in Latin America combined.

Three main factors are in play: For one, geography. Sharing a border with the United States means heavy products are cheaper to transport across than if they were manufactured in, say, Asia.

A second factor is NAFTA, the North American Free Trade Agreement. Mexican products are subject to lower duties than those from other countries. In fact, the Economist points out that Mexico has trade deals with 44 countries, the most of any nation in the world.

The third factor is wages. As other manufacturing hubs become more expensive, Mexico has become more competitive. According to HSBC, in 2000 Mexican workers earned nearly five times the salary of their Chinese peers. But, by 2011, Mexican workers were only about a third more expensive than Chinese workers.

When you project all these advantages into the next few years, Mexico's economic future looks robust. The National Intelligence Council released an important report called, "Global Trends 2030."

One of the trends it looks at is how demographic changes will shape the world. Countries with younger, more dynamic populations will grow faster.

While the median age in Mexico will be 34 in 2030, the median Chinese or Russian age will be about ten years older. Japan's median age will hit 52. America actually has an advantage here, at 39 our median age will only be five years older than that of Mexico's. Trends don't ensure particular outcomes, but it's clear that contrary to its global image, Mexico's economy has momentum. It will be among the world's top ten economies by the end of this decade.

Smart reforms can build it further. The irony is that one possible impediment to Mexico's growth could be the very country that is its biggest asset, the United States.

If we slow down, so will Mexico. But perhaps that can be avoided if Washington's polarized factions could agree on a way forward. Maybe we need to take some lessons from south of the border.

Up next, the inside story on a tough, controversial decision. Why the Obama administration bailed out the auto industry. I'll speak with Steve Rattner, the president's lead advisor on the bailout.


CANDY CROWLEY, CNN ANCHOR: I'm Candy Crowley in Washington with a check of the headlines. South Korean officials say that rocket launched by North Korea earlier this month shows the reclusive nation has developed the technology to fire a warhead capable of reaching the United States. Despite international condemnations the launch was seen as a boost to the credibility of North Korea's new leader, Kim Jong-Un.

Italy has pulled itself out of the debt crisis, according to the outgoing Prime Minister Mario Monti. Monti is widely credited with saving Italy from a financial meltdown after stepping into the prime minister's role following the resignation of Silvio Berlusconi last year. Monti's resignation sparked concern that Italy may slip back into a recession.

President Obama and members of the Senate will gather later today to say good-bye to one of their own. Senator Daniel Inouye who represented Hawaii in Congress since its statehood. He died last week of respiratory complications. Inouye was 88. Senate Majority Leader Harry Reid has called on Hawaii's Governor Neil Abercrombie to quickly appoint a successor before the end of the year.

Ted Kennedy Jr., son of the late Edward Kennedy is considering a run for John Kerry's Senate seat. That's according to his brother, former Congressman Patrick Kennedy. "The Boston Globe" reports that Ted has reached out to family members, friends and some prominent Democrats including John Kerry about the possible run. He would most likely face off against former Senator Scott Brown who lost his seat to Elizabeth Warren in the November elections. Those are your top stories. "Reliable Sources" at the top of the hour. Now back to Fareed Zakaria GPS.

ZAKARIA: What would you do if in the midst of a crushing global recession the fate of over a million jobs rested with you and just a few others? Nearly four years ago that was the question facing Steve Rattner, a former private equity fund manager who had been named President Obama's car czar, the chief adviser to the president on the newly formed auto task force. It was early 2009. The Dow Jones had recently had its largest single day point drop. 2.6 million jobs had been lost and banks and businesses were frequently failing. Few companies, though, were as battered as the big three automakers. In January of that year alone, GM sales were down 49 percent, Ford's down 40 percent and Chrysler sales had fallen 55 percent. A very tough decision had to be made, extend a lifeline with billions and billions of taxpayer dollars to the auto industry or let it run its own course. "Tough Decisions" is the latest GPS special. Viewers in North American can watch it tonight on CNN at 8 and 11 p.m. Eastern and Pacific. Right now, Steve Rattner takes us inside the decision to save Chrysler.


STEVE RATTNER, FORMER "CAR CZAR" UNDER PRES. OBAMA: It was unbelievably scary. I would literally wake up in the middle of the night and say to myself, not to be self-aggrandizing, that in the way the future of the car industry could rest on my shoulders. We were making decisions every day that dwarfed any decisions I'd ever had to make previously in terms of the amount of money, the number of people that were involved, the consequences of getting the decisions wrong. We had no idea what we were going to do. I was not a car guy. We inherited nothing from the Bush administration. No files, no papers, no analysis. We literally walked into an empty room and sat down, took out our pencils and said, well, now what are we going to do?

ZAKARIA: So, when you looked at the companies, did they look to you inefficient?

RATTNER: Certainly, they were over leverage, we all knew that, they had too much debt, they couldn't sustain it. Secondly, they had way too much capacity. There was no possibility that they would ever need all the overhead that they had and, then, thirdly, as we got into the due diligence process, we found that they were not particularly well managed, especially, frankly, General Motors. I had had this image of General Motors as one of the great icons of American industry and it was one of the worst managed companies I'd ever seen in my professional career.

ZAKARIA: So, you are looking at it, you know, from the point of view of the government. How do you think about what your options are?

RATTNER: Really, only two choices with both General Motors and Chrysler. Put money in and save them in some kind of restructuring or watch them liquidate, close their doors and fire all their workers. Those were the only two choices. If General Motors have been allowed to go bankrupt, and when we say bankrupt, we mean an uncontrolled liquidation, essentially, it would have brought down the entire U.S. car industry because if General Motors have gone, the suppliers would have gone. If the suppliers have gone, Ford would not be able to get parts for its cars. My guess now is it would have been over a million jobs lost in essentially a nanosecond.

The real decision, the really tough decision we had to make was over Chrysler, because Chrysler was a marginal player. It was the number three car company in the U.S. It did not have a single car on the "Consumer Reports" recommended list. It had no operations of any consequence outside the U.S. and so, a classic approach would be to say failing companies should fail and why shouldn't Chrysler fail? On the other hand, we knew that if Chrysler were allowed to fail on day one, something like 300,000 people would lose their jobs, including the dealerships and so on, the suppliers across America. And that's a huge number of jobs, obviously. And so, this was the, this was the toughest decision we had to make in the whole process was, could Chrysler be saved? And even if it could be saved, should it be saved?

ZAKARIA: And the way the process worked. I'm interested, there was a meeting in the White House where it was almost like the two sides presented their best case.

RATTNER: It was exactly like that. Look, Larry Summers is a professor and loves -- he was a debating champion in college. He loves the arguments. And so, we sat in his tiny little office, which looked like it had been last renovated in the 1950s for hour after hour, around his little table. And there were two really, really I though well argued strong points of view. One, that it should be saved for all the reasons I've tried to spell out and the other that this is a time to let a company go. And GM and Ford would ultimately be the beneficiaries of it.

ZAKARIA: There was an actual vote?

RATTNER: Larry was very big on participatory democracy up to a point, so there were votes. And it got to four to four. And I hadn't yet voted. And I'd said some things on one side, I'd said some things on the other side. I was honestly really torn. And Larry said, all right, Steve, what do you want to do? And I thought and I thought and I said to myself, you know, if Chrysler can be saved at this moment in the economy, even though it does trouble me on some level, it's the right thing to do. And I said I think we should save it. So, that made it five to four. Larry was quietly in favor of saving it, which was relatively obvious to all of us. But then we went down to see the president. We had the first meeting in the Oval Office and we go around and around and then the president really hadn't been prepared for this meeting. It was a little bit haphazard, frankly. And he - at the end his assistant comes in and says, you've got to go, Mr. President. He said, look, I'm not going to make this decision on the fly, let's get together again tonight. So, then we go into the Roosevelt Room. Do the whole thing all over again. And the president is very good about listening to both sides. Everybody has a chance to speak, if they haven't spoken, he calls on them. And at the end he kind of puts his head in his hand and he thinks for a second and he said, I've made my decision. If Chrysler can be saved and be made profitable again, then that is the right thing to do.

ZAKARIA: Looking back, do you think it was the right decision?

RATTNER: Oh, absolutely because Chrysler, oddly enough, is doing much better than we ever expected. You know, one of the thing that I learned from this experience is anybody can call plays from the grand stand. And throughout this process, I was reading the papers about somebody saying, well, they should do this, somebody say you should do that. I got lots of e-mails. Well, you should do this kind of - it is very easy to say that stuff when you're not actually having to make the decisions. But when you're sitting there, as the president was, as Larry Summers and as I in a smaller way was and you actually have to make these decisions, you just focus on the essential core of it and you just really get down to the essence of it and say, what is the right decision to make this come out the best way possible? And you strip away the rest of it.


ZAKARIA: That was my conversation with Steve Rattner. Remember, you can watch our latest special "Tough Decisions" tonight at 8:00 p.m. And 11:00 p.m. Eastern. Don't miss it

But up next, a fascinating look at communism. How it seduced so many governments in the last century. The Pulitzer Prize winning author Anne Applebaum joins me.


ZAKARIA: In the last couple of years, a number of countries have moved towards democracy, Egypt, Libya, others and many historians studied this process of democratization. But perhaps just as interesting and important is how countries in the not too distant past were seduced by communism. That's the question Anne Applebaum sets how to explore in "Iron Curtain: The Crushing of Eastern Europe." She won a Pulitzer prize for her previous book "Gulag", published nearly a decade ago. She's back now. Welcome, Anne.


ZAKARIA: So, when you think about building democracy in the Middle East, you think about building civil society, putting in place independent courts and such. When you look at this process, which I think of in some ways as a kind of reverse process, after World War II, what is it that the Soviets and local communist parties do to create communism in Eastern Europe?

APPLEBAUM: One of the interesting things that I found while doing the research for this book was how similar the patterns were in these really very different countries after the war. When the Red Army arrived in one of the -- one of its conquered territories. It always did, there were three or four things that it always did right away. Number one, perhaps the most obvious, was set up the secret police. Number two, slightly less obvious, was take over the radio station.

ZAKARIA: Why the radio station?

APPLEBAUM: Because they cared about mass media. They thought the radio is what they can reach the peasants and the workers, and they weren't so interested in intellectuals and people who read newspapers.

ZAKARIA: There is a parallel here, right? Putin, I noticed he allows newspapers to flourish in Moscow and St. Petersburg with the few hundreds thousands people they may reach, but TV, which reaches tens of millions, he controls very tightly. APPLEBAUM: Absolutely. It's exactly the same pattern and I don't think it's an accident. I mean it's -- you know, the Russians know this. They know this bit of history and they remember how this was done and Putin was in the KGB and the KGB would have had an institutional memory of how -- how you take over countries and keep control of them.

ZAKARIA: So, secret police, radio.

APPLEBAUM: And then, perhaps less obvious and more surprising, elements of what we now call civil society. So, anything that was self-organized had to immediately be taken under control. And so, very early on, there is attacks on the boy scouts. You wouldn't have thought this was the Red Army's main priority, but, actually, it was. I mean they are interested in the scouts, they are interested in young people and independent groups of all kinds. From 1945, from the time they get there.

ZAKARIA: To what extent were the people of Eastern Europe complicit in this or certainly the leaders of some of these movements? Did they, did they show courage? Could they have shown courage in opposing this imposition of totalitarianism?

APPLEBAUM: You know, in any society, there is a tiny number of people who really are quite nasty collaborators in this kind of situation, and very cynical and there's maybe a tiny percent of people who are very courageous. You know, in Poland there were people who went to fight in the woods with guns, but 80 percent of people, though, want to move on with their lives. You know, they want their children to go to school, they want to take care of their sick parents and one of the, sort of the horrifying genius of communism in a way, this is true of other totalitarian systems, too, is that it didn't ask that much of you. You know, you had to do your job and maybe you had to march in the May Day Parade and maybe you had to agree to put a poster on the wall and, you know, you made these small compromises because you knew that if you didn't the consequences could be very tough. And people did go along with it. Of course, the downside from the regime's point of view is they went along with it unhappily or reluctantly and later on, when the system began to unravel, this is part of the explanation for why. You know, people - people did go along, but they were not happy, they were - they were - there was a kind of discontent about it.

ZAKARIA: So, when people look at the Middle East now, they're struck by how difficult it is to build genuine democracy and this - some argument, well, this - they don't have the institutions, but I think there is a lingering suspicion that they're not part of the Western world. They haven't had the history and the contrast is often to Eastern Europe and to 1989 and the idea is that, well, that happened so easily, that the Berlin Wall fell and hey presto, all these countries became good, solid democracies. Is that a fair reading?

APPLEBAUM: It's not really. I mean, first of all, after '89 it was not so smooth. I mean, though, the countries that were communist before then had had very different fates. And the fate of Poland and the fate of Albania and the fate of Russia are quite different. And so, it was more - the - the - in many cases, actually, it was the degree to which civil society and those society had been maintained or had been reconstructed that made the big difference between how well they recovered.

ZAKARIA: But civil society can be quite nasty itself. I mean a lot of the most, the nastiest Islamist groups in the Middle East tend to be very rich, civil society organizations that provide social welfare you know they just happen to believe in very, very extreme form of Islam and there are parallels in Europe, as well.

APPLEBAUM: And the interesting thing about Islam, I think it's the Islamic movements in that part of the world, I think are really at an important turning point. Until now, they've had a lot of credit, if you will, and a lot of the populations put a lot of faith in them, because they were the only alternative to the government. I mean, one either because they were somehow tolerated or because they were able to be more powerful, because they had access to mosques and better ways of organizing people. They were often the only civil society organizations that were allowed to be functioning. Now that the regimes have fallen and now that there's more pluralism in these societies, it's really - it's going to be interesting. Will they now, will they now participate in creating new kinds of societies where there are other kinds of groups, where other kinds of organizations are allowed to take control or will they attempt to create a new form of authoritarianism or a new form of totalitarianism where only their form of Islamism is allowed.

ZAKARIA: What is your guess?

APPLEBAUM: I think it's going to be different in each country.

ZAKARIA: And in a sense, that is the part of the lesson, again. As you said, one often forgets in the idealized version of '89 in Eastern Europe that there is Belarus, there is Albania. There are places that haven't done so well.

APPLEBAUM: Absolutely there are places that haven't done well. I mean there are places that have been extremely successful like Poland and the Czech Republic and there are - there are others who haven't. And it's be careful always about making a kind of blanket statement about a region or a society. These are different places. And Libya and Egypt could not be more different. Egypt is a very rich society in many ways, very complex economic structure, lots of private business. Many different religious groups. Libya is, I was in Libya a few months ago and was stunned to realize that there hadn't even been an official political party under Gadhafi. So he didn't even have a kind of fake single party. There was actually nothing, You know, sort of in Libya you're starting really from scratch. There's practically no private business, very thin kind of society, it's extremely different from Egypt and outcomes are maybe totally different, as well.

ZAKARIA: Anne Applebaum, pleasure to have you on.

APPLEBAUM: Thank you. ZAKARIA: And we will be back.


ZAKARIA: Santa Claus and his elves may claim the top side of the North Pole, but one nation state is claimed by placing a flag on the sea floor beneath the North Pole. My question of the week is, which nation's flag flies submerged in the ocean beneath the North Pole? Is it a, the United States, b, Canada, c, Russia or d, Denmark? Stay tuned and we'll tell you the correct answer.

This week I have two books of the week. Suggestions for your Christmas gift lists, but both by an author you are familiar with, me. If you're concerned about what's happening in the Arab world these days, check out "The Future of Freedom", it's about democracy everywhere past, present, future. If you want to put the rise of China and India and others in context, pick up the "Post American World," which is out in a new improved version, released 2.0 Buy the books, please, and make my publishers happy.

And now, for the last look. Americans are perhaps the most avid UFO aficionados. It seems there are reports of alien sightings somewhere in this country almost every week. But we're not alone in thinking well, we're not alone. Thousands of miles away Indians have started to spot the same, strange bright lights. Hundreds of reports on luminous objects in the night sky, some of them reported as tennis ball sized, others looking apparently like Chinese lanterns have been spotted along the India/China border. Of course, there are many who believe that lights don't represent aliens at all, they represent Chinese. Chinese satellites or drones or some apparatus to spy on India. The border between China and India, remember, remains hotly disputed and the two countries went to war over it in 1962. India's defense minister has had to make a statement in recent weeks that read in part, there is no conclusive proof of unidentified flying objects flying over the India/China border. Does that mean those lights do come from China? He doesn't say.

The correct answer to our GPS "Challenge" question was, C. in 2007, a Russian submarine planted that nation's flag under the North Pole. It is made of rust-proof titanium and just a few months ago, a Russian orthodox bishop went and gave a special blessing to the top of the world. The Russians might think they're being nice, but other nations with claims out there feel that Russia's behavior is really quite naughty. Don't forget viewers in the United States can catch our latest GPS special tonight. It's called "Tough Decisions" and it examines how major decisions are made in everything from national security to business to family affairs. It airs tonight at 8:00 p.m. and 11:00 p.m. Eastern and Pacific. Don't miss it.

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