MR. MCLAUGHLIN: Issue One: Who's paying the war tab?

MITCH DANIELS (DIRECTOR, OFFICE OF MANAGEMENT & BUDGET): (From videotape.) On September 11, the two World Trade Towers were not the only structures which were brought down, and one could say that the twin towers of America's fiscal health and strength were leveled at essentially that same time.

MR. MCLAUGHLIN: Such are the grim words of Mitch Daniels, director of the White House Office of Management and Budget this week. War has a price tag. How much has the terrorist war cost the U.S. economy for the last two months, since September 11, and projected to cost the next six months, starting December 1? Answer: Over $600 billion.

Here are some numbers, defensible ones, probably low-balled, measured as increases in federal government spending owing to terrorism, plus its direct and indirect costs.

First, federal spending figures: Airline bailout, $15 billion; emergency terrorism funding, $40 billion; increases in unemployment, Medicare, Social Security outlays, $9 billion monthly; 3.7 million Americans are currently unemployed.

Defense Department: The Pentagon says $1 billion monthly to wage the war, but the Office of Management and Budget has withheld $20 billion of emergency terrorist aid for the Pentagon. But the Pentagon budget planners say that $20 billion will last only until February, five months from September 11th. Twenty divided by five yields a $4 billion monthly war ticket, not $1 billion.

Health and Human Services: $500 million for smallpox immunizations and Cipro antibiotics.

Now the economic toll: World Trade Center cleanup, $20 billion, modestly; insurance industry losses, $55 billion; tourism industry -- hotels, airlines, rental cars -- $10 billion. Network television ad revenue lost: $700 million in one week alone, September 11 to September 18, non-stop terrorism coverage.

Stock market losses: $75 billion for the high-tech sector alone, September 11 through October 11, one month, although some rebound since. Mutual funds and 401K portfolio losses and unrealized profits, August through September, although some rebound since: $250 billion.

U.S. macroeconomy shrinkage, 1 percent for 2001 and for the first half of 2002: $200 billion.

Grand total, anti-terrorist spending and direct and indirect costs, eight months, September 11, 2001 through May 30, 2002: $610 billion and mounting. It is only now beginning to dawn on policymakers that the ship that hit America's economic and political landscape on September 11th is of earthquake proportions, seismic. The politics of the surplus are over. Deficits are back for four years at least.

MR. DANIELS: (From videotape.) It is regrettably my conclusion that we are unlikely to return to balance in the federal accounts before possibly Fiscal '05.

MR. MCLAUGHLIN: Question: Year one of Enduring Freedom will cost over $1 trillion, an estimate. So how long will it take for America to climb out of this recession? Lawrence Kudlow.

MR. KUDLOW: Well, John, the recession climb-out is going to come out a lot faster than you'd believe. I think next year the economy can grow at three and a half percent. I think that the first quarter will show signs of recovery, positive GDP growth. And that, by itself, for next year can add as much as $600 billion to national income, of which most of it is going to be real output, the best kind.

You're wrong about the stock market and the 401Ks, with all due respect to your green-eyeshade exercise, which does have merit in some areas, but that has all rebounded and come back very nicely. And you should have told people that our total economy is $10 trillion, so this is a relatively small amount. And moreover, when you get into issues of assets and so forth, we have about $100 trillion of assets on the books of the United States, and that doesn't count, of course, for entrepreneurship and human creativity and the like.

So here's my basic point. Because of this tragedy and this war, a complacent Fed woke up and started putting money supply into the economy. Because of this war, Russia has held the line, our new ally, Mr. Putin, on energy prices, which is a huge recovery factor. And finally, maybe -- I have my fingers crossed -- we'll get one or two supply-side tax-cut incentives for business depreciation and income taxes. And all of that will grow the economy by perhaps a trajectory of 4 percent going forward, which will more than make up for these temporary losses.

And don't forget the improved spirit of the American people moving back towards traditional cultural values. And we are going to show the world that we can recover, and then some.

MR. MCLAUGHLIN: Eleanor, do you feel better now?

MS. CLIFT: He is definitely wearing rose-colored glasses. I'm surprised you can even see through them, they're so deeply-colored pink.

MR. KUDLOW: Well, I washed them before we came on.

MS. CLIFT: Look, what happened to this country is the equivalent of a family being struck by a catastrophic disease. You spend what it takes to get well. So I don't begrudge the money here. But we should not blame all of the declining funds on 9/11. In fact, the economy was moving into recession before 9/11. It's been officially declared in recession since March. And President Bush gambled on a tax cut that largely rewards better-off people in this country.

MR. MCLAUGHLIN: One-point-three trillion.

MS. CLIFT: That's right. And that is responsible for a lot of the absence of money as we look 10 years out.

MR. KUDLOW: How many years?

MS. CLIFT: He is going to finance this war on terrorism the same way Ronald Reagan, I guess, financed -- excuse me, I get to finish here -- the same way Ronald Reagan got to finance the Cold War. And it worked for Ronald Reagan, but it's incredibly cynical, because it passes a tax on Generations X, Y and Z. And the administration compounds the error by now not wanting to spend the money it's going to take to stockpile vaccines, to do the kind of security measures that we need in this country.

MR. MCLAUGHLIN: Lord Keynes wrote a book in 1940 and it was titled "How to Pay for the War." And he said the best way to pay for it is borrow on the best possible terms without imposing an excessive burden on the post-war generation. He recommended compulsory saving bonds; they should be issued to be repaid later to offset the widely-expected post-war slump. His biographer believes that that's the most brilliant insight he's ever had. Do you share that view? Are we going to get into the question here of how do we finance all of this?

MR. BLANKLEY: No, I don't --

MR. MCLAUGHLIN: Is it going to be guns and butter? Is it going to be guns only? Is it going to be a butter budget only? What's it going to be?

MR. BLANKLEY: No, I think this war is different than World War I or World War II in that we're not going to have the massive runnings of factories creating the extraordinary burdens of debt, whether it was the British empire or the United States government during World War II. And so you're not going to have the sort of inflated economy and the letdown afterwards.

This is different. I think we've incurred the greater burden of the cost in the initial round of destruction. But the economy, I think, will slowly adjust to a more normal, not to a wartime economy. So I think what we're talking now -- and we heard, by the way, from Eleanor the opening round of the Democratic critique leading into the election year next year, trying to say that this economy is Bush's fault, not September 11th's.

MR. MCLAUGHLIN: You see the Democrats gaining from the current situation?

MR. BLANKLEY: They're going to try. James Carville, the former president's political consultant, put out a memo a few weeks ago in which he itemized the Democratic strategy, which is to go after the economy, to blame Bush for the bad economy, to blame him for shortchanging the public and the working man and to give money to the plutocrats and the big business. And that's a strategy --

MS. CLIFT: Thank you, Tony. (Laughs.)

MR. BLANKLEY: We heard the Democratic Campaign Committee, Nita Lowey, announce just a few days ago that the Republican economic plan was unpatriotic. And that was the word she used -- "unpatriotic." So the Democrats are very aggressively going after the economy as a way to try to go after the president.

I think it's going to backfire on them, because the public is overwhelmingly supportive not only of the president in the war effort, but they understand that September 11th made a difference in the way the economy was going. And I think the Democrats' effort -- and I think it's an unfortunate one, because it's unraveling the spirit of unity that, to a certain extent, has existed in this country.

MR. MCLAUGHLIN: Do you have a copy of the Carville memorandum?

MR. BLANKLEY: It's on the Web. It's on the Internet. Yes, it's available.

MR. MCLAUGHLIN: Good. I have one, and we'll have a grand old time next week picking that apart. Welcome, Dr. Baker. I took that quote, by the way, of Lord Keynes from your lovely newspaper, the Financial Times. Now, what can you bring to this discussion of war finance, war economics?

MR. BAKER: First, I'll have to say, I think there is the slightest hint of fuzzy math about some of those numbers that you presented to us.

MR. MCLAUGHLIN: Would you care to specify which ones you are taking exception to?

MR. BAKER: Yeah. And as Lawrence said, what's happened in the stock market, the wipeout of the stock market of wealth did occur in the weeks after September 11th. Much of it has come back.

MR. MCLAUGHLIN: You noticed that I did say with some rebound. But in the interest --

MR. BAKER: Yeah, but you didn't take the numbers away. I mean, you still had the numbers up there --

MR. MCLAUGHLIN: I didn't take the numbers away because I thought it was proper to record the numbers.

MR. BAKER: But I don't want to get into a --

MR. MCLAUGHLIN: But I also --

MR. BAKER: -- dispute about the numbers because that section -- (inaudible). You're right, this is going to be very costly.

MR. MCLAUGHLIN: Is it of earthquake consequences, not only economically but also politically?

MR. BAKER: No. There's a big difference from what Keynes was talking about. There's nothing on the scale of the Second World War that we're going to face here. But Eleanor is right. The economy was in recession before September the 11th. We know that September the 11th made things much worse, but the economy was in recession since March.

MR. MCLAUGHLIN: You think it would have gone into recession without the acceleration of September 11th?

MR. BAKER: It's questionable. There's an argument about whether it was. But there was no question that the economy was in a very weak state.

MR. MCLAUGHLIN: Go on to your point.

MR. BAKER: That wasn't President Bush's point. We know, of course, that wasn't. For the economy, the economic slowdown began back in the summer of 2000. The real problem, however -- and this is where the Democrats do have a point -- is that the damage that was done to the fiscal position was well in place before September the 11th as a result of the $1.7 trillion tax cut.


MR. BAKER: That was an extraordinary -- it was sold as a stimulus for an economy that was supposedly slowing. It wasn't a stimulus to the economy. The very first Bush budget that came out in April had absolutely no economic stimulus whatsoever. It was a supply sider's dream. I'm sure people like Lawrence were delighted with it. It was not about stimulation of the economy. And what it has done, it has unraveled the strong fiscal position that the United States had got itself into over the last 10 years. And you're going to be paying and we're all going to be paying --

MR. MCLAUGHLIN: You think we're going to get -- we're facing depressed demand, or do you think we're facing inflationary (overstretch?)?

MR. BAKER: We're facing depressed demand at the moment. No question we need economic stimulus. But the Federal Reserve has provided most of the economic stimulus that we need so far. All of this talk that we've been hearing about how monetary policy wasn't effective and we needed fiscal stimulus, that's all baloney.

MR. MCLAUGHLIN: Just tell me -- one minute --

MR. BAKER: It was all baloney. We've seen the economy come back already.

MR. MCLAUGHLIN: Will you just tell me when we're going to get back to irrational exuberance?

MR. BAKER: I wouldn't be surprised if we're there already. I mean, you look at the valuation in the stock market. They already depict a degree of irrational exuberance on the part of a lot of investors. What we are going to get back to -- and here I do agree with Lawrence -- we are going to get back to a reasonable rate of growth probably next year, and then we're going to have to start thinking about rebuilding the fiscal position of the government --

MR. MCLAUGHLIN: Tony, please unscramble the eggs.

MR. BLANKLEY: Yeah. Well, first of all, you talk about a fiscal state. By any historic measure, even with the deficits that are going to be caused by this war and by the spending related to it, we're in wonderful fiscal strength.

MR. BAKER: Not anymore you're not.

MR. BLANKLEY: Of course we are. If they had a $100 billion deficit a year, we're in fine fiscal shape compared by any time in recent history.

MR. BAKER: Only the last 25 years.

MR. BLANKLEY: The last 25-year period --


MR. MCLAUGHLIN: Tony, have you got a main point?

MR. BLANKLEY: And the idea that a tax cut is bad for the economy is the kind of mentality that got us into stagflation in the '70s and that was rejected in the '80s and gave us the growth that we've had for the last 20 years.

MR. MCLAUGHLIN: What falls by the wayside because of this period of fiscal constraint? What falls by the wayside? Social Security privatization? Forget it. Prescription drugs for seniors? Forget it.

MR. BLANKLEY: Keep in mind, with the low interest rates that we have now, debt costs the government a lot less money than it did when we had 8, 10, 12 percent interest rates. Now we're down --

MR. MCLAUGHLIN: Will you let go of that bone and get to the point I'm getting at? What legislation is going to fall by the wayside? I've mentioned two. What else will fall by the wayside?

MR. BLANKLEY: I'm not convinced -- I believe that Washington is getting back into the non-war zone of legislating next year. I think Social Security is going to be a challenge because of the policies that are being proposed there. I don't think they're going to have much bipartisan support.

MS. CLIFT: There's no money for Bush's campaign promises. He ran a whole presidential campaign promising seniors prescription drug coverage and his fantasy about investment accounts. The same people who worked on Enron's books worked on Bush's campaign promises.

MR. BLANKLEY: Now, wait a second --

MS. CLIFT: They were never achievable, and they are certainly not achievable now in a deficit --

MR. MCLAUGHLIN: Exit question.


MR. MCLAUGHLIN: Exit question. We've got to move on. Does the new political landscape favor the Democrats, the Republicans, both or neither? Lawrence.

MR. KUDLOW: This thing should wind up helping Bush considerably for the very simple reason, John, that the only thing that matters politically is economic growth. That's the issue. And I believe all the signals point towards a recovery next year. That recovery, incidentally, will spill over revenues to finance the defense increases, with only a temporary and fleeting budget deficit.

So coming out of this, I think Bush is going to look fine. But I sure wish that he would do what the OECD, the international OECD, just recommended. You know what? Take our top marginal tax rate from 40 back to 28, and that will finance Social Security, wartime spending, health care reform and all the rest. Economic growth is the weapon to winning the war.

MR. MCLAUGHLIN: After his State of the Union message in two months, what's the budget going to be? Is it going to be a guns and butter? Is it going to be a guns versus butter? He obviously has a huge amount to do in rebuilding the military, which is so deteriorated.

MR. KUDLOW: I actually agree with --

MR. MCLAUGHLIN: And he's got to rebuild the CIA and he's got to rebuild the FBI.

MR. KUDLOW: I actually agree with you on this war and domestic security side. It could add $100 billion a year to the budget. But I don't think it's guns and butter.

MR. MCLAUGHLIN: Well, what's the political impact of a guns-versus-butter, favoring guns, budget on next year's elections and the White House in '04?

MR. KUDLOW: People are going to love the guns budget because this is all about --

MR. MCLAUGHLIN: But they're going to --

MR. KUDLOW: -- winning the war against terrorism.

MR. MCLAUGHLIN: But it's going to take away their privatization of Social Security. They're going to take away their prescription drugs and a variety of other social programs.

MR. KUDLOW: Not in the next 12 months. In the next 12 months, the issue is going to continue to focus on winning the war and getting Americans back to work. And I think Bush will have good results on both.

MS. CLIFT: People want guns --

MR. MCLAUGHLIN: If we get Osama and he's declared dead, you will soon see a lot of the air go out of the balloon.

MR. KUDLOW: I don't think so, John.

MS. CLIFT: I agree with that. People want guns and butter. But assuming they finish the task in Afghanistan, it's going to be hard to sustain a high-level military effort, and people's attention is going to turn to the economy. But the Democrats are getting risky with an ad campaign calling it Bush's recession, because Bush is going to say it's Osama's recession.

MR. MCLAUGHLIN: Is that out there already?


MS. CLIFT: It's out there. It's about three months premature.

MR. MCLAUGHLIN: Are you predicting a takeover of the House of Representatives in 2002?

MS. CLIFT: I think it's still kind of unknowable, frankly, as to how this is going to play out.

MR. MCLAUGHLIN: You think it favors the Democrats, so the general situation --

MS. CLIFT: I think if the country is paying more attention to the economy than war, it favors the Democrats.

MR. BLANKLEY: To answer your question, at this point it doesn't favor either. The war issue favors the Republicans. The economy right now favors the Democrats. It may very well not by next summer. I think it's too early to tell. The question is, how do the Democrats play the patriotism issue? So far I think they're on the brink of misplaying it. And so I think at this point neither party has an advantage. It's going to be a very close fight for the House next year.

MR. MCLAUGHLIN: That's not telling me what I want to hear.

MR. BLANKLEY: What do you want to hear?

MR. MCLAUGHLIN: I want to hear you say that you think the current situation favors the Democrats and time is on the Democrats' side.

MR. BLANKLEY: I don't think that's the case.

MR. BAKER: I think it's -- it does depend on the war. If the war is over quickly, if Osama bin Laden is captured or killed --

MR. BLANKLEY: The war's not going to be over quickly.

MR. BAKER: Well, the first --

MR. BLANKLEY: They're going to go into Iraq and Somalia.

MR. BAKER: We'll see about that. If there is a clear, definitive victory in this first, which there's already -- (inaudible) -- there, but certainly if Osama bin Laden is captured, that will shift attention back onto the economy. Now, then, the question is whether or not -- I don't think Democrats will be successful in blaming Bush for the recession. But what they should focus on is blaming Bush for the state of the fiscal position, because it is this administration's responsibility.

MR. MCLAUGHLIN: This is a prolonged war we're facing. We've got Somalia --

MR. KUDLOW: How about praising Bush for the recovery? How about giving Bush credit for a likely recovery?

MS. CLIFT: Because that's all you do. That's your job, Larry. (Laughs.)

MR. BAKER: Because it's the Federal Reserve that deserves the credit for the recovery by having --

MR. KUDLOW: (Inaudible.)

MR. MCLAUGHLIN: So you think it's --

MR. KUDLOW: The Fed is not on the ballot. Only the president is on the ballot.

MR. MCLAUGHLIN: Would you elect either the Democrats or the Republicans as to who's going to be favored in 2002 by the then-state of affairs?

MR. BAKER: We saw from the off-year elections that we had this year, interestingly -- I'm thinking of the governor's races in Virginia and New Jersey -- that actually, when the debate focused on the question of taxes versus spending, actually you did see some gains for the Democrats.

MR. MCLAUGHLIN: I think --

MR. BAKER: So if that is the focus of the debate next year, if that is the focus of the election, then I think Democrats --

MR. MCLAUGHLIN: I think a guns-versus-butter budget always favors the Democrats, at least in this particular situation. I predict that it will not only be close, but I think arguably at this point the Democrats will take over -- excuse me, the Republicans will take over -- excuse me, the Democrats will take over the House of Representatives. And the Democrats, I think, have a good chance of taking over the White House.

When we return, what motivates those who want to ban therapeutic cloning? Is it only religious taboo?


MR. MCLAUGHLIN: Issue two: Send in the clones.

PRESIDENT BUSH: (From videotape.) The use of embryos to clone is wrong. We should not, as a society, grow life to destroy it, and that's exactly what's taking place.

MR. MCLAUGHLIN: These strong points from the president were provoked by the news this week that a Massachusetts biotech company successfully cloned human cells. That cellular cluster is called a morula -- six tiny pre-embryonic cells, together the size of the point of a needle.

MICHAEL WEST (ADVANCED CELL TECHNOLOGY): (From videotape.) Our purpose is not to clone humans but to make new technologies available to cure presently untreatable diseases.

MR. MCLAUGHLIN: Here's how it works. Researchers strip the DNA from a donated egg. They then insert into that egg the DNA from the skin cells of an adult human. This becomes a morula, which is a clone, a genetic and microscopic replicate of the adult who donated the skin cells.

The scientist then extracts stem cells from that morula, or clone, and from those stem cells, parts of the body can be grown, like a liver, a kidney or a brain cell, all of which would be a perfect match to the donor's liver, kidney or brain cell, spare parts to treat patients suffering from heart failure, diabetes, Parkinson's, and manifold other diseases.

The U.S. House of Representatives has already voted to ban all human cloning at any phase of the process, whether reproductive or therapeutic. The Senate has yet to act.

SEN. RICHARD SHELBY (R-AL): (From videotape.) I believe it will be, perhaps, a big debate, but at the end of the day, I don't believe that we're going to let the cloning of human embryos go on.

SEN. PATRICK LEAHY (D-VT): (From videotape.) I find it very, very troubling. I think most of the Congress would.

SEN. RICHARD DURBIN (D-IL): (From videotape.) I think if the members of the Senate hear from members of the families across America about their hope that this medical breakthrough will mean that their families and loved ones are going to have a chance at life they might not otherwise have, I think it could make a real difference in the debate.

MR. MCLAUGHLIN: Assuming a difference between therapeutic cloning and reproductive cloning, my question is, should America's public policy ban therapeutic cloning unconditionally, regulate it, or leave it alone? Lawrence Kudlow.

MR. KUDLOW: We should ban all cloning. I stand with the president on this. And I think Sam Brownback's ban will pass the Senate. And Senator Daschle, who is pro-choice on the abortion issue, is going to vote in favor of cloning banning.


MS. CLIFT: Senator Daschle is in favor of what he calls therapeutic cloning. So you're wrong on that. This is not a human embryo in the classic way we think of an egg implanted by a sperm. This is an egg that has been activated to replicate cells, and it is not human in any sense of the word.

MR. MCLAUGHLIN: It's pre-embryonic.

MS. CLIFT: Pre-embryonic. And it holds enormous promise for scientific breakthroughs. And the notion that in a country where abortion is legal and it's been upheld numerous times by the Supreme Court, that we would think of giving this pre-embryonic collection of cells greater rights by banning any --

MR. KUDLOW: Senator Leahy --

MR. MCLAUGHLIN: I've got to get out.

MS. CLIFT: -- (inaudible) -- is totally ludicrous.

MR. MCLAUGHLIN: What's the best course of action -- to ban it, to regulate it or to --

MR. BLANKLEY: They should leave it alone. They will pass laws against it. They will pass many laws against it. But the technology will drive through, and 10 years from now we'll be having therapeutic cloning.

MR. MCLAUGHLIN: You think the Senate is going to vote in favor of the six-month moratorium?

MR. BLANKLEY: It probably will.

MR. MCLAUGHLIN: You think so?

MR. BLANKLEY: If they get to a vote.

MR. BAKER: We should ban cloning. It's a slippery slope towards the manipulation of human life for utilitarian aims, and it's absolutely wrong and it should be banned immediately.

MR. MCLAUGHLIN: You know, in England, their view of this matter is far more scientific than what I've just heard from your lips, sir -- a disappointment.

MR. KUDLOW: But John, all of Europe --

MR. MCLAUGHLIN: No, seriously, we have to --

MR. KUDLOW: All of Europe has a ban on cloning, too. So Gerry is -- (inaudible).

MS. CLIFT: This is not human cloning of a baby. This is activating cells.

MR. MCLAUGHLIN: The kind of dogmatism that I'm hearing from you is what prevails in this whole debate. It's time for clear, rational and scientific thinking. We'll be right back with predictions.

MR. KUDLOW: This Boston company has gone nowhere on the issue.


MR. MCLAUGHLIN: Prediction: When will Osama bin Laden be found, and dead or alive? Lawrence.

MR. KUDLOW: Osama will be found dead in December, and the recovery starts in the first quarter.


MS. CLIFT: I don't think they're linked.


MS. CLIFT: Before the temperature dips too far below zero, he will be found, likely dead.


MR. BLANKLEY: He's a coward. He's going to be found alive by the end of the winter.

MR. BAKER: He'll be found dead within weeks.

MR. MCLAUGHLIN: Your answer is correct. Thank you for coming, Gerry Baker. Dead within weeks. Bye bye.