MR. MCLAUGHLIN: Issue one: Market meltdown.

PRESIDENT GEORGE W. BUSH: (From videotape.) So our economy is beginning to sputter. I believe I was asked about the markets today. I'm sorry people are losing value in their portfolios. That worries me.

MR. MCLAUGHLIN: It was another wicked week on Wall Street. The Dow slid below 10,000 for the first time in six months. The tech-driven Nasdaq plunged to its lowest point in three years, down 60 percent from its historic high. Last week alone, more than $500 billion evaporated from the market. With 50 percent of Americans owning stock, the pain is being felt across all economic strata.

Around the world, investors are worried. The Nikkei, the Japanese stock exchange, hit a 16-year low on Wednesday with the worst to come, with Japan's overextended banks. Exchanges in London, Paris and Frankfurt hit 16-month lows.

Question: President Bush says the economy is beginning to "sputter." Is there a danger that Bush's new frank talk will undermine consumer confidence further? Lawrence Kudlow.

MR. KUDLOW: No, I don't think so. Look, from Alan Greenspan on down, every economist on the planet knows that the economy is sputtering. Indeed, we're either on the cusp of a recession or we're in a recession. So I think Bush's honesty and candor is quite refreshing, and I think most Americans would say that they're tired of being dissembled to, as they were in the prior administration, and appreciate Bush's honesty.

MR. MCLAUGHLIN: Were they dissembled to in the present president's father's administration, or was he just lights-out?

MR. KUDLOW: No, I think Papa Bush --

MR. MCLAUGHLIN: You recall that he seemed to be detached from the condition of the economy in '91.

MR. KUDLOW: I think he was detached, but I think he was honest about the shape of the economy; maybe too much so. But the point here is that the Democratic argument -- look, the is the Clinton recession. This is a function of high taxes, high regulations and -- let me amend that -- this is the Clinton-Greenspan recession, because of exorbitantly tight money from Alan Greenspan. All George Bush is doing is acknowledging all this and then trying to provide some help with a more accelerated tax cut, which is the real news.

The administration is now shifting its position. They want a much stronger tax bill than the one in the House, and they're willing to expand the size of the tax cut as well.

MR. MCLAUGHLIN: We're going to get to that in a minute. What about my point? Do you think he's making -- he's causing a loss of consumer confidence by his words?

MS. CLIFT: Well, first off, what I want to say it's going to be a really hard sell to say that the Clinton policies that gave us eight years of prosperity are suddenly responsible for the economic woes that we're seeing, and --

MR. KUDLOW: This started last year. This started last year before Bush took office.

MS. CLIFT: Unemployment is low, inflation is low, and what we're seeing is the irrational exuberance being squeezed out of the economy, which is what Alan Greenspan wanted. And President Bush, what he's doing in his desperate search to find a rationale for these tax cuts, has seized on the slowing economy as reason for his tax cuts, when his own Treasury secretary says the tax cut as presently constituted would not stimulate the economy. This is a rhetorical box.

MR. MCLAUGHLIN: Do you think that Bush is setting himself up? He gets his tax cut and we get a recession, which means that he has the rap of the recession. As soon as that tax cut takes effect, it is then unmistakably Bush's economy.

MR. BLANKLEY: I think the White House has the challenge of overselling their argument about the stimulative effect of the tax cut. As far as your first -- so yeah, there is some risk. As far as the first question is concerned, you know, Nixon once said that honesty isn't the best policy, but it's worth trying once in a while. And I think that Bush has to be careful not to be honest too much because he can talk it down a little bit.

MR. MCLAUGHLIN: What can you tell us that's new about the tax cut? Are they trying to front-load it? And if so, how are they going to do it? In other words, they have to get -- as O'Neill pointed out in an off-limits meeting --

MR. KUDLOW: To Republican and Democratic senators.

MR. MCLAUGHLIN: O'Neill said that there's not going to be enough relief from this tax cut to help in this recession in the beginning; it's going to take too much time; you've got to do something about that; you've got to a change the structure of the tax cut; you've got to front-load it. Do you know anything about that? Did you cover the story?

MR. WARREN: Yes. They're going to try to do that. And I suspect they're going to fail at doing that, though you need not worry about the specter, given your large stock portfolios, of winding up, say, in a Catholic charity soup kitchen. I don't think things are going to get that bad, because, as Eleanor suggests, the underlying basics here are still very strong; productivity high, inflation is low, unemployment as well. I think the big shock is we've got a generation of folks who have been through 10, 11 years of this booming economy and know nothing else, and don't realize that sometimes the stuff goes down.

MR. MCLAUGHLIN: What's the structure of the new -- the changes in the tax cut as proposed? Now it's set for $1.6 trillion. What's it going to climb to?

MR. KUDLOW: I don't know that, and those numbers are bogus because they have no dynamic feedback. The point is, the House tax cut bill had only $5.6 billion of stimulus, and only lowered the lower bottom bracket. What O'Neill has pushed for, and has gotten Bush to sign off on, apparently, is to have all the bracket rate reductions reduced starting in 2001, and with a pickup in 2002. So this thing will have some credibility. It may not prevent a recession. That was never the issue.

MR. MCLAUGHLIN: You mean they're going to climb it back to January 1 in all brackets.

MR. KUDLOW: As much as they can. There's about a $125 billion on-budget surplus that can be used. But the point is, you'll get better investment next year, better capital formation and a continuation of the productivity.


MS. CLIFT: But it's time to compartmentalize. The tax cut over here -- Bush is going to get rate cuts throughout. That's going to be a victory. He's not going to get as much for people in your category as he'd like.

But the slowing economy is a whole separate category, and the administration prides itself on its discipline and focus on looking for their plan to address the slowing economy. They don't have one yet.

MR. MCLAUGHLIN: Well, let me move on. Is Japan dragging us down? Did Japan cause or trigger this crisis?

MR. KUDLOW: No, I don't think so. But the basic underpinnings of this global slump is excessively tight money, a liquidity shortage, starting from the central banks in the United States, the Fed, including the central bank of Japan and the central bank of Europe also. That's the biggest issue.

MR. WARREN: And exposure --

MR. MCLAUGHLIN: Isn't it true that 90 percent of Japan's economy is still protected from foreign competition, the keiretsu? Even the mom and pop shops -- they're all protected. When is Japan going to open it up, instead of dragging us down?

MR. WARREN: Well, if they do it, they're going to have do it voluntarily. They're not going to do it because we say it. And to follow up on what Larry said, the reality is, I think, also that there is some reason for anxiety in our exposure to burgeoning Japanese debt.

MR. BLANKLEY: Yeah. Well, plus the Japanese --

MR. MCLAUGHLIN: Exit -- quickly.

MR. BLANKLEY: Japanese banking is in a crisis. And while the economy there has been bad for 12 years, I think the current disappointment and the failure of Japan to strengthen could be exacerbating the situation.

MR. MCLAUGHLIN: Japan has dropped to 1985 levels. We dropped to 1998 levels. Japan is in tough shape.

MR. KUDLOW: And China --

MR. MCLAUGHLIN: But Japan's got to wise up. How long is it going to take?

MR. KUDLOW: But China is about to pass Japan --

MR. MCLAUGHLIN: Exit question: Are we headed for a full-fledged recession? Yes or no.

MR. KUDLOW: I think the probability now is above 60 percent. Yes.

MR. MCLAUGHLIN: So there goes your soft landing. There goes your happy talk.

MR. KUDLOW: I did what I could. I did everything I could.

MR. MCLAUGHLIN: How deep a recession, and how long?

MR. KUDLOW: I think it'll be relatively short --

MR. MCLAUGHLIN: Three months?

MR. KUDLOW: -- and relatively mild, but the Federal --

MR. MCLAUGHLIN: It's got to be at least six months, or you don't have a recession.

MR. KUDLOW: It'll be at least six months. The Federal Reserve has got to expand the money supply and keep dropping interest rates. And we've got to have credible tax-rate reduction as soon as possible.

MR. MCLAUGHLIN: How steep? How steep?

MR. KUDLOW: I think this is going to be very mild. I actually agree with my colleague Jim Warren that the long wave of prosperity from productivity and technology is likely to stay intact.

MR. MCLAUGHLIN: How long and how steep, Eleanor?

MS. CLIFT: I don't think it's going to meet the technical definition of a recession. I think this is a corporate deflation. And earnings do not match prices, and I think people have lost money in their 401(k)s, and the so-called wealth effect is gone. People are not going to be out there consuming as much. But I don't think we're in for deep recession.

MR. MCLAUGHLIN: This is Eleanor "don't worry, be happy" Clift.

MR. KUDLOW: (Laughs.)


MR. MCLAUGHLIN: No recession.

What do you say?

MR. BLANKLEY: I think there is going to be one, and I think the conventional wisdom for so long -- that it was going to be either not happening at all, or short and shallow -- is still pervading thought. And the potential for a deeper and longer one exists, which is why it's so important to have the tax cut in, not necessarily to stop it from starting, but to help end it quicker.

MR. KUDLOW: Right. That's --

MR. MCLAUGHLIN: So what is that? What does that add up to?

MR. BLANKLEY: Yes. (Laughter.)

MR. MCLAUGHLIN: Yes. That means two quarters, that means six months, and medium-steep, I take it. What do you think?

MR. WARREN: Part of my being succinct and, despite what Mr. Lawrence -- Mr. "15,000 Dow" Kudlow -- believes, I say no.

MR. KUDLOW: I'm still there.

MS. CLIFT: That's "35,000 Kudlow." (Laughs.)


MR. KUDLOW: You know the key point here, if anyone's watching interested in this subject, is buy and hold -- the stock market will continue to do great in the long run, just as it has --

MR. WARREN: You sound like a stock broker! (Laughs.)

MR. KUDLOW: -- just as it has. That's what the historical numbers show you. This country is still a free country, and with easier money and lower tax rates, help is on the way.

MR. MCLAUGHLIN: Are we in -- are we in panic?

MR. KUDLOW: No, I don't think there's a panic. I don't think there's a -- we're just going through a --

MR. MCLAUGHLIN: You never sell when you're in panic or you're near panic. You don't sell.

MR. KUDLOW: Buy and sell and hold. Buy and hold.

MS. CLIFT: If you have a long enough horizon. If you're under 40, stay in that stock market. (Laughs.)

MR. KUDLOW: Buy and hold.

MR. MCLAUGHLIN: The answer to my question is -- as to whether we are going into a recession, the answer is yes. It will be six months, and it will be shallow.

When we come back, how many campaign pledges has Bush broken already? Answer: More than you think.


MR. MCLAUGHLIN: Issue two: Promises, promises! (Music plays, "Promises promises" by Naked Eyes.) Broken promises; that's what critics were charging this week when President Bush reversed his campaign pledge to regulate carbon dioxide emissions from power plants.

REP. DICK GEPHARDT (D-MO): (From videotape.) Once again, the special interests paid a visit on the White House, and things got turned around.

SEN. HILLARY CLINTON (D-NY): (From videotape.) In less than eight weeks in office, President Bush has gone from CO2 to "See you later."

MR. MCLAUGHLIN: The president defends his action on the grounds that controls on carbon dioxide emissions would cause energy prices, already inflated, to skyrocket.

PRESIDENT BUSH: (From videotape.) Well, I was responding to reality, and reality is, the nation has got a real problem when it comes to energy. We've got an energy crisis in America that we have to deal with in a common-sense way.

MR. MCLAUGHLIN: Well, sir, tell that to your EPA chief, Christie Todd Whitman. She's been calling for curbs on carbon dioxide. You've given an opening to your adversary.

SEN. JOHN KERRY (D-MA): (From videotape.) This is the second time, I think, in two weeks, that at a policy announcement by a secretary in Bush administration has been reversed --

MR. MCLAUGHLIN: The first time was Colin Powell, secretary of State. Powell announced that he would continue negotiations with North Korea on its missile program right away, and at the point where the Clinton administration had stopped. The next day, Powell was forced to back off.

COLIN POWELL (U.S. secretary of State): (From videotape.) The president forcefully made the point that we are undertaking a full review of our relationship with North Korea --

MR. MCLAUGHLIN: And Bush has moved away from two other big campaign promises; one, to toughen sanctions against Iraq. Now, correctly, he wants to ease them and has put new, focused sanctions on incoming Iraqi military hardware.

And finally, during the campaign, Bush said he would promote moving the U.S. Embassy in Israel from Tel Aviv to Jerusalem, as Israel wishes. Well, that's now on the back burner, at best.

SECRETARY OF STATE COLIN POWELL: (From videotape.) The instability in the region right now suggests that we ought to approach it with delicacy.

MR. MCLAUGHLIN: Question: Which campaign pledge did Bush break first? I ask you, Tony Blankley.

MR. BLANKLEY: Well, the first pledge probably was the increase in the defense budget, which he so far has not honored.

MR. MCLAUGHLIN: And on Saturday, Rumsfeld was instructed by the president to tell the Pentagon that there would be no supplemental increase at all in this year's budget. None.

MR. BLANKLEY: Yeah, I understand that. I think, however, that I admire a president who recognizes when campaign pledges, particularly at the periphery of his issues -- the central issue was cutting taxes. He's sticking with that promise. But sometimes you do things in campaigns that are not good policy, and the quicker you correct it, the quicker you have good government.

MR. MCLAUGHLIN: Well, shouldn't there be some -- what are we talking about here, truthfulness, or what?

MS. CLIFT: Well, I never heard Tony commend President Clinton for breaking a campaign promise. And, you know, sometimes situations do change. But the promises you list, his reversal on the carbon dioxide is shameful. It's the wrong --

MR. BLANKLEY: No, it's not.

MR. MCLAUGHLIN: Let her finish.

MS. CLIFT: Excuse me!

MR. BLANKLEY: It's not shameful.

MR. MCLAUGHLIN: Let her finish!

MS. CLIFT: It's the wrong decision on the merits. And the way he did it, he hung his EPA secretary out to dry. And when she went out the next day and said "No comment," those words spoke very loudly that she didn't approve of the way --

MR. BLANKLEY: That was the smartest decision. That was the smartest decision he made. It was a terrible policy. It was one phrase slipped into one speech.

MR. MCLAUGHLIN: It was a smart decision. But the smartest decision was telling Powell not to do a deal with North Korea now because that would put South Korea at a disadvantage when South Korea is co-existing, at best, right now, but trying to work its way, and it would look as though we were dealing with --

MR. BLANKLEY: These are good decisions the president's making.

MR. KUDLOW: These are basically sound decisions. Look.

MR. MCLAUGHLIN: What's the reason he gave on the CO2?

MR. KUDLOW: One of the key reasons --

MR. MCLAUGHLIN: The reason he gave was the California crisis.

MR. KUDLOW: Right. The People's Republic of California engendered this incredible crisis with their over-regulated system. Furthermore, you would raise the cost of electricity and damage economic growth, which is already damaged. Like any good bond trader, Bush assesses market changes and makes pivots when they're appropriate. It was a very good play on his part.

MR. MCLAUGHLIN: Because we have a guest here today, I want to point out to him what Ralph Waldo Emerson said about this subject. He said, quote, "A foolish consistency is the hobgoblin of little minds, adored by little statesmen." All this talk about George Bush changing his mind is unmerited because you should change your mind when conditions change. Otherwise, it's obduracy and stubbornness.

MR. WARREN: And if Ralph Waldo Emerson would have been walking around some of the lakes which are now dead in upstate New York and throughout New England --

MR. KUDLOW: Oh, jeez.

MR. WARREN: -- precisely because of the carbon dioxide wafting in, he might have disagreed with the market-forces argument of Larry. Look, the reality --

MR. MCLAUGHLIN: What do you want? Bad air or no jobs?

MR. BLANKLEY: (Laughs.)

MR. WARREN: The reality also is that campaigns, whether you're on a farm in Iowa or you're in an old, dilapidated mill town in New England, there's a degree of political hyperbole that takes play. When it comes to Bill Clinton, one should note that even though in '92 there were two big promises -- one, rescinding --

MR. KUDLOW: He -- (inaudible) -- promise. He broke his tax cut promise.


MR. WARREN: -- one, rescinding -- his gays-in-the-military promise and his tax cut promise -- but generally speaking, he fulfilled most of them.

MR. KUDLOW: That was an excessive campaign --

MR. MCLAUGHLIN: Excuse me. Excuse me. Quick exit. On the merits, not the politics, just the merits, did Bush do the right thing in reversing gears on carbon dioxide? Yes or no.

MR. KUDLOW: Totally yes.

MR. MCLAUGHLIN: Totally no?

MS. CLIFT: Totally wrong. Shortsighted.

MR. MCLAUGHLIN: It's totally no.

MS. CLIFT: Not concerned about the future of the planet.

MR. BLANKLEY: Yeah, it's probably the wisest single decision he's likely to make this year.

MR. MCLAUGHLIN: That's totally yes?

MR. BLANKLEY: Totally yes. Very important.

MR. WARREN: As Ralph Waldo Emerson would agree -- (laughter) -- no. (Laughter.)

MR. MCLAUGHLIN: The answer is totally yes; he was right.

Issue three: Rangers' rage.

JASON DENNY (former U.S. Army Ranger): (From videotape.) We need to make noise about it. We need to make everybody know that this is the wrong thing. Earn, not issue. That's right, fellows.

MR. MCLAUGHLIN: Former U.S. Army Rangers were in Washington last week to protest a plan to make the black beret the official headgear of the entire Army.

Since the Korean War, black berets have been worn by Rangers, the elite, rapid-reaction strike force numbering only about 2,400 in the whole Army. It stretches back 400 years, with names like Nathan Hale, Francis Marion, Abraham Lincoln. Rangers led the way in battles from Omaha Beach to Korea to the Mekong Delta. The first half hour of "Saving Private Ryan" portrays their mission.

Last fall, out of the blue, General Eric Shinseki, Army chief of staff, announced that by June 14th of this year, black berets would be issued to every U.S. soldier. Since then, discord has rumbled through the ranks. Former Ranger David Nielsen marched 700 miles from Fort Benning to protest the action, joining a rally at the Lincoln Memorial last week.

DAVID NIELSEN: (From videotape.) The black berets means "Ranger."

MR. MCLAUGHLIN: Shinseki may be on slippery ground. A "buy America" law requires all military uniform items to be made in the U.S. of U.S. components, but over 600,000 berets are being made in China.

That fact gave the winch of the Rangers' rage an extra turn, and it didn't sit well on Capitol Hill, either.

SEN. TIM HUTCHINSON (R-AR): (From videotape.) There's something unseemly about our men in the Army having a beret that has a "made in China" label on it.

MR. MCLAUGHLIN: President Bush joined the argument this week and directed the secretary of Defense to review both the decision and the purchase. At week's end, a compromise was reached. The Rangers will surrender their black berets and dutifully don tan ones, so that the rest of the Army can sport their black berets.

Question: Why didn't Bush tell Rumsfeld earlier to stop the whole idea of taking the black berets away from the Rangers? I ask you, Eleanor Clift.

MS. CLIFT: I guess we know who wears the beret in this administration. I don't --

MR. MCLAUGHLIN: You mean George.

MS. CLIFT: No. I don't know.


MR. CLIFT: Interpret that how you will. I mean, I think Rumsfeld is pretty powerful. I don't know what his fixation is about berets. I think he thinks if you give everybody a beret, that will boost their morale. It's a ridiculous decision. And a beige beret doesn't have the cachet of a black beret, so he pleases nobody with this decision.

MR. BLANKLEY: Let me give you the answer. Traditionally, the uniformed service decides what the uniforms are, not the civilians. And that's why Rumsfeld had kept out of it. But the idea that our top general is wasting his time thinking about chapeau fashions suggests that he's not the right man for the job.

MR. MCLAUGHLIN: What about the 600,000 that are being made by the People's Republic of China? If you were in the armed forces and your life was at stake, do you want to be wearing a Chinese beret?

MR. KUDLOW: No, I don't. I'd rather a nice British trilby, actually. But I think more important than the China thing -- which is bad, I concede the point -- is this: This Clintonian social engineering of the armed forces, eliminating esprit de corps, reducing morale, ignoring valor and bravery, you know what the next step is? Everyone in the armed forces will have five stars on their shoulders and on their hats. I mean, they are breaking great American military tradition, and I wish Mr. Rumsfeld would do something more decisive.

MS. CLIFT: Hey, where is this Clintonian? This is Bush's --

MR. WARREN: You know that the --

MR. KUDLOW: This beret thing started last autumn under Clinton.

MS. CLIFT: Well, call Clinton. (It was ?) a mistake, Larry.

MR. WARREN: Yeah. Larry would rather have them contract out to Giorgio Armani. But the thing I'm fearful of, you know, the Rangers --

MR. KUDLOW: How about just a nice English trilby.

MR. MCLAUGHLIN: Hold on, Larry.

MR. WARREN: The Rangers are absolutely fabled for their toughness and their willingness to exist in the most extreme conditions; you know, even eating rats and snakes. My fear now is that some poor Army cook or limp-wristed, geeky computer kid is going to show up with that black beret in a tavern populated by Rangers, and watch out, we're going to have internal class warfare.

MR. MCLAUGHLIN: Do you think that something has to be said about the sanctity of tradition and badges of distinction? Have we lost all of the warrior culture? Have we lost the sense of honor and duty and self-sacrifice and valor and common good in this country?

MR. BLANKLEY: I don't think the men and the women in the service have, but I think that a lot of these bureaucratic generals, these peacetime generals get obsessed with the -- you're right -- the Clintonian social engineering rather than war-fighting.

MS. CLIFT: If you're talking about social engineering, there are a lot of women in today's volunteer Army, and they belong there.

MR. BLANKLEY: I mentioned women. I said men and women.

MS. CLIFT: And we have a volunteer Army --

MR. MCLAUGHLIN: Do you think --

MS. CLIFT: We have a volunteer Army in a time of prosperity.

MR. WARREN: War --

MR. MCLAUGHLIN: Wait a minute, wait a minute.

MS. CLIFT: And they've had trouble recruiting. They're trying to raise morale. It's not --

MR. MCLAUGHLIN: Exit question.

MS. CLIFT: -- complicated.

MR. MCLAUGHLIN: Exit question. We have a buy-American law. This is on its face a violation of that law. The components of military goods must be made in the United States. And the talk about there being a waiver is in itself -- it's spurious to think that there could be a waiver.

My question to you is, should those 600,000 berets be, I don't know, unloaded in the sea, sold on some other market? Should they be distributed?

MR. KUDLOW: Those berets, and this whole policy, should be quietly disposed of. And I think Mr. Rumsfeld needs to rethink this is in terms of military tradition.

MS. CLIFT: I don't mind berets made in China. I mean, the whole world has weapons that say, "Made in the USA." So, I mean, fair is fair.

MR. MCLAUGHLIN: Yeah. This is the hammer of equality.

MS. CLIFT: We're all wearing Chinese stuff. Why not?

MR. MCLAUGHLIN: Whether you're a Boy Scout and you believe in God, you've got to let the atheist in because we all have to be equal.

MR. BLANKLEY: Yeah. No, we ought to just throw them into Boston Harbor.

MR. MCLAUGHLIN: Boston Harbor.

MR. WARREN: Wardrobe aside, we still have the best-equipped, best-trained fighting force there is. Why don't you contract out, if you want to, with some plant in Salvador, take the 600,000 berets and maybe give them to Larry's friends who will most benefit from those tax cuts which are going to save us from recession.

MR. MCLAUGHLIN: James has --

MR. KUDLOW: The deep tax cuts. The deep marginal rate tax cuts.

MR. MCLAUGHLIN: James has lurched into the truth. We'll be right back with traditions.


MR. MCLAUGHLIN: Predictions. Lawrence.

MR. KUDLOW: The Federal Reserve will cut its policy interest rates 75 basis points on Tuesday.



MS. CLIFT: Governor Pataki will succeed in convincing the Bush administration to remove Mary Jo White as U.S. attorney in New York and get their own person in.

MR. MCLAUGHLIN: Pataki? What's got into him?


MR. BLANKLEY: Zimbabwe, former Rhodesia, is on the brink of internal violence because of a breakdown in respect for property rights.

MR. MCLAUGHLIN: Mugabe. He's no good.

MR. WARREN: Due to the gluttony of Congress, President Bush will fail to keep spending at his desired 4 percent growth rate. It will be higher.

MR. MCLAUGHLIN: Best actor, Russell Crowe. Best actress, Julia Roberts. Take it to the bank.

Happy Saint Patrick's Day. Bye-bye.