updated 2/8/2005 3:54:25 PM ET 2005-02-08T20:54:25

Guest: Paul Krugman, Dana Milbank, John Fund, Jane Mayer, Jon Corzine, John Thune

CHRIS MATTHEWS, HOST:  All the president‘s men and women hit the road and the airwaves to sell the second-term agenda, as President Bush rolls out a $2.5 trillion budget. 

Let‘s play HARDBALL.  

Good evening.  I‘m Chris Matthews.

President Bush has sent his proposed bug for 2006 to Congress.  The president admits it is lean.  Some Democrats say it is mean with proposals to cut or eliminate 150 domestic programs.  More on the president‘s budget proposal in a moment. 

But, first, a week after Iraq‘s elections, insurgents stepped up attacks against Iraqi security forces with two suicide bombings and mortar fire that killed at least 30 people. 

Republican Senator John Thune of South Dakota just returned from visiting Iraq.  He‘s a member of the Armed Services Committee.

Senator Thune, it is a perfect time to have you on.  You‘re just back. 

How well are we developing our security force over there, our Iraqi security force? 

REP. JOHN THUNE ®, SOUTH DAKOTA:  One of the things we did while we were there, Chris, was visit with General Dave Petraeus, who is in charge of training the Iraqi security forces.  And they‘re very upbeat about how things are going.  The election has generated a lot of intensity, a lot of people who want to join the forces. 

The challenge I think is developing the command structure, building the leadership capacity to lead those troops.  But in terms of the numbers, the training, the equipping, all that‘s going on, both in the Army, the National Guard, and the police force over there.  They feel very confident that they‘re making significant progress toward getting the Iraqis trained to defend themselves. 

MATTHEWS:  How has the election affected things? 

THUNE:  Well, it was remarkable to see the exuberance of the Iraqi people.  We talked with a number of Iraqi voters, all of whom risked their lives in many cases going out to vote. 

And they are extremely just thrilled at the opportunity to vote.  And, in fact, it is a great tribute to the power of freedom.  But I think what that has done is generated a momentum for the effort there that is taking a lot of the wind out of the sail of the insurgents.  Now, as you just mentioned, they‘re still going about trying to recapture that momentum by returning to the violence. 

But I think it is going to be increasingly difficult for them to sustain that in light of the Iraqi people‘s thirst for freedom.  They really, really are thirsty and hungry for an opportunity to have a democracy and to be free. 

MATTHEWS:  You know, Senator, that, at home, here in American politics, passion matters most.  If you really care, you‘ll get out and vote. 

What happens if we have a country in Iraq that is maybe 80 percent, almost 90 percent pro-government?  They like elections.  They believe in democracy and majority-rule.  But if 10 or 15 percent of the people, mainly the Sunnis don‘t, and they‘re willing to fight and give their lives in a rebellion, how do you stamp it out with the regular nonpassionate people against the crazed people? 

THUNE:  I think that the Sunni minority—there‘s a majority of the Sunni minority I think who want to see this democracy work.  But there clearly are the insurgents who comprise a part of that group are becoming increasingly marginalized I think in this process, although they still—the violence and the threats and the terrorism continues. 

But if this new government—and it looks like it‘s going to be a Shiite alliance ticket majority, absolute majority, effectively reaches out to the Kurds and the Sunni minorities and incorporates and involves them in forming the government, in ratifying a constitution, I think we can stamp out or at least hopefully stamp out some of the insurgent elements there. 

But right now, the challenge I think is getting the Iraqi security forces trained.  It is getting a government stood up there that is inclusive, that incorporates and includes these other minority groups and parties.  And if we can do that, things look hopeful there.  That is not to say there‘s not a lot of heavy lifting.  There‘s going to be turbulent times ahead.

But I think there‘s a lot of optimism, a lot of hope that we‘re making progress. 

MATTHEWS:  Let me ask you about this, Senator.  Iran has a Shiite majority.  It‘s run by its mullahs, its clerisy.  If Iraq gets the same form of government led by the mullahs, how do we know they won‘t export terrorism the way that Iran does through Hezbollah or some organization like that? 

THUNE:  Well, I think that‘s a—that‘s something we‘re going to have to monitor closely.  We met with some of the leaders of the Shia alliance ticket, the people who are going to be in the majority and raised questions question about the relationship with Iran and whether or not they were going to be engaged. 

And they gave us a lot of assurances that they‘re going to work within Iraq with the minority groups to form a government in Iraq. 

MATTHEWS:  Yes.   

THUNE:  To have a democracy there.  And they understand the concerns that have been expressed about the elements in Iran that are unfavorable toward the U.S.

So I think that‘s a concern.  It‘ something we‘re going to have to monitor closely. 

(CROSSTALK)  

THUNE:  But, again, this is a process which is working and I think right now working effectively. 

MATTHEWS:  Senator, I have got—only have time for one last question. 

Judy Miller of “The New York Times” reported to us last week the United States government is reaching out to Ahmad Chalabi, who the government apparently feels will be a big part of the new government over there.  Did you meet with him?  Did you hear anything about U.S. efforts to try to connect up with Chalabi, a man who has had some difficulties with the West? 

THUNE:  Well, we did not meet with him.  But we did—there were some discussions about that.  And I suspect that he may have some involvement or presence in this new government. 

But, as you mentioned, there‘s a storied history and a storied past there.  But we‘re hopeful, I guess, again, that this process as it moves forward will be an inclusive government and, if the effort is made the reach out to all the groups in Iraq, that this can be a successful effort. 

MATTHEWS:  OK, thank you very much, Senator John Thune of South Dakota. 

President Bush sent his budget proposal to Congress.  And he admits it is lean.  But is it too lean for congressional Democrats? 

Senator Jon Corzine, Democrat of New Jersey, is a member of the Senate Budget Committee. 

Senator, let me ask you about this situation.  What do you make of the fact that the president‘s war proposals, the $80 billion that‘s coming down the track for more spending in Iraq and Afghanistan, was not included? 

SEN. JON CORZINE (D), NEW JERSEY:  Well, I think the budget is a little lean on facts, Chris. 

First of all, as you point out, it doesn‘t put anything in for a war in Iraq or Afghanistan, does nothing about dealing with the Social Security proposal that the president wants to lay out, which will be very expensive, doesn‘t do anything with adjusting the AMT, which is the ultimate tax reform.  And it does nothing really to disclose to the American people that the costs of the tax cuts that if fully implemented are going to really undermine our fiscal security. 

So it‘s really short on facts, the war being probably the most important expenditure.  But there are plenty of things with regard to our tax policy that are left out.  It‘s also lean from my point of view on spending on domestic discretionary issues.  We‘re even cutting homeland security, block grants in this proposal that the president has put forward. 

I could go through this line by line.  Amtrak.  For we in New Jersey, we‘re interested in beach replenishment.  There are just a whole host of programs, this 150 they talked about in the State of the Union, that I think is going to be disastrous; 18 percent of the budget is taking all of the hits.  And I think that‘s a mistake. 

MATTHEWS:  He‘s cutting put to money you spend in New Jersey to replace lost beach, right? 

CORZINE:  Lost beaches, Amtrak.  Our transportation funding is going down.  Our homeland security block grants are going down, community development block grants, all of the things that actually end up impacting individual lives. 

And maybe the most important, because we have such high property taxes in New Jersey, this is the first time in 10 years that education budgets have gone down or a proposal for education budget go down, $12 billion shy of where full funding of Leave No Child Behind would be, special education and ideas underfunded by $3.5 billion.  It‘s a major, major problem for our state and local communities. 

MATTHEWS:  Well, the people voted for a conservative Republican president.  He was reelected by three to four million votes.  Isn‘t this what we should expect, given our electoral system in this country? 

CORZINE:  Well, I think that the president has a right to make those proposals.  But that‘s why we have a Congress.  And I don‘t think it will be just Democrats that are standing up trying to push back against some of these discretionary domestic spending cuts. 

And I think there are a lot of people that will be very frustrated that, year after year, we have left out our expenditures on defense budgets, properly disclosing to the American people.  This is almost $100 billion added to the 2005 expenditures.  And we know there will be more expenditures in Iraq and Afghanistan in 2006.  This budget just completely ignores the reality. 

MATTHEWS:  Let me ask you, is this like Vietnam, where President Johnson, a Democrat, never publicly admitted the cost of the war in Vietnam and gave us phony books on that war? 

CORZINE:  Well, I think it is a little different, because the president is always playing catchup here.  He come and asks for these supplementals. 

I think it is actually a sleight of hand more on budgetary policies.  They‘re telling the American people we‘re only going to have a $427 billion budget deficit.  By the time we get through 2006, it is going to be a lot higher, because we‘re going to have these expenditures to prosecute the war in Iraq and Afghanistan. 

MATTHEWS:  You know, you‘re the man who really understands the markets, coming from running Goldman Sachs.  And you understand Wall Street.  I‘m curious.  This is a big question for me as well as everybody else watching right now.  When is the tipping point?  When is the United States simply relying too much on international borrowing to pay for our own budget?

CORZINE:  Chris, it is always hard to call when markets are going to tip over.  And I think your use of the phrase tipping point is the right thing. 

But we‘ve started to see it in the erosion of the dollar.  It hasn‘t been dramatic yet, but it is about a 20 percent erosion.  These markets tend to accumulate this information over a period of time.  You remember back to the crash of 1987.  It happened in actually a two-week time frame.  These accumulated budget deficits, particularly with money being held by some people who might have different strategic interests than the United States. 

MATTHEWS:  Right. 

CORZINE:  China in particular, and some of our Middle Eastern so-called oil partners, all could decide at some point in time that they want to hold a lot fewer dollars.  And that I think will be a major problem.  And that tipping point could very well come.  We shouldn‘t be so dependent on foreign oil. 

MATTHEWS:  Senator, what would happen—and I hate to scare people, but what would happen, then, if people like the Saudis and the Chinese, Beijing government, decided they want to sell off their dollars?  What would happen? 

CORZINE:  Well, you would have prices going down first in the bond markets in America and around the globe, U.S. dollar denominated.  You would see the dollar on a spike down.  And then it would actually translate into weaker equity prices, if not shockingly weaker ones. 

And that‘s what people would call a crash.  That has happened at different points in time.  It is a disequilibrium that even Chairman Greenspan has talked about.  We need to worry about this buildup of foreign debt and buildup of need to borrow a billion or two—almost $2 billion a day right now from overseas lenders to be able to balance our trade deficit. 

MATTHEWS:  OK, thank you very much, Senator Jon Corzine.

CORZINE:  My pleasure.

MATTHEWS:  Member of the Senate Budget Committee from New Jersey.

When we come back, the “New Yorker”‘s Jane Mayer takes us inside a secret U.S. program which sends terror suspects overseas to countries that use torture.

You‘re watching HARDBALL on MSNBC. 

(COMMERCIAL BREAK)

MATTHEWS:  Coming up, inside America‘s—quote—“extraordinary rendition” program, where terror suspects are sent to countries that are known to use torture—when HARDBALL returns.

(COMMERCIAL BREAK)

(NEWS BREAK)

MATTHEWS:  Welcome back to HARDBALL. 

During his confirmation hearings, Attorney General Alberto Gonzales argued that the U.N.‘s ban on cruel, inhuman and degrading treatment, degrading treatment, of terrorist suspects does not apply to U.S.  interrogation of foreigners in other countries. 

And in this week‘s “New Yorker” magazine, Jane Mayer reports that the

rendition secret extraordinary rendition program—that‘s what it‘s called

·         to capture terrorist suspects and then send them overseas has expanded beyond its original intent. 

Jane, thank you.

My notion of rendition is, we catch a bad guy, somebody we think is a bad guy.  He is not a soldier.  He is a terrorist.  We don‘t want to use the rubber hose on him or whatever, so we send him to a nice pleasant jail cell in Cairo four levels down in the dark, and that‘s where we get the truth out of him.  Is that what rendition is? 

JANE MAYER, “THE NEW YORKER”:  That is what they‘re doing.  But that‘s how it was in the old days.

Now we‘re also taking some of these guys into our own hands.  We‘re having them beat up in another country and then we‘re putting them in places like Guantanamo or if they‘re really high-value suspects, we‘re taking them ourselves.  The CIA has got people in detention facilities almost all around the world. 

MATTHEWS:  Is that legal under our government rules and regulations? 

MAYER:  It‘s not legal to torture someone.  We can do almost anything else.  But, no, you cannot torture someone.  So that‘s why we‘re outsourcing torture. 

MATTHEWS:  So, generally, your story, you talked about Syria as an example in your piece.  I was amazed that the Syrians were on our side. 

MAYER:  Early on, they were.  They‘re not now.  Before the war in Iraq, they were trying to work with us.  And, after the war in Iraq, they‘ve stopped doing that.  We‘re mostly using Egypt at this point.  We‘re using Jordan a lot, too, to outsource some of these things. 

MATTHEWS:  Right. 

Give me an image of it, so people can watch—there are people right, left and center who watch this program.  And they have whole different attitudes about—a lot of people say, well, why should we treat these guys like regular soldiers who really are honorable despite the fact they‘re against us in some wars, to treat them like honorable soldiers, like guys doing their job who are in many cases conscripted?  Why treat guys like Osama bin Laden and his crew like them? 

MAYER:  Well, the question is not whether you treat them like soldiers.  It is also whether you treat them like criminals. 

What we‘re doing is not treating them like either, which is what is creating the problem. 

MATTHEWS:  Are we treating them worse than criminals? 

MAYER:  Yes, because, if they were criminals, they would have right to a lawyer.  They would have certain rights.  They would be able to be charged with a crime.  They would be put on trial, as we do in this country. 

A lot of the people who are most upset about this, Chris, which thank interested me, were FBI agents, people who have been fighting terrorism for a long time, who are saying, there are going to be some unintended consequences of this program.  You are not going to ever be able to prosecute these people in the regular courts, because you torture somebody someplace, you can‘t ever put them on trial. 

(CROSSTALK)

MATTHEWS:  Why not? 

MAYER:  Because there‘s an idea in our system that it shocks the conscience of the court.  You can‘t use forced, coerced confessions against somebody. 

MATTHEWS:  So, if they ever get any kind of lawyer on their side, that lawyer will point out that they were tortured and that‘s the end of the case.

MAYER:  Well, the worry is that—the worry is these people will walk.  And it has actually happened. 

In Germany, we have got a case where one of the people from the Hamburg cell that was involved in the 9/11 attacks was on trial. 

MATTHEWS:  Right, Mohamed Atta‘s crowd.

MAYER:  And he was convicted.  His name is Motassadeq.  He was convicted and his conviction was overturned because the evidence was considered too weak because the U.S. could not give a witness against him, because we can‘t let this witness out of our custody. 

MATTHEWS:  Alan Dershowitz has argued the—he loves to make an argument and he is obviously a great creator of trouble, like I to be sometimes.  Alan Dershowitz says, if you have got a guy who knows about a bomb about to go off and it‘s going to kill people, you have got to put his thumbs to the screws. 

MAYER:  That‘s definitely the argument.  If you have got this ticking time bomb thing, they say you ought to torture them. 

But what the people who are really—not that Alan Dershowitz is not in this field.  He‘s a lawyer, but he is not an interrogator.  And the interrogators say, you do that to someone, you‘ll get a confession, but it may not be a true confession. 

MATTHEWS:  OK, let me ask you.  I have an image of—there‘s a picture in fact in “The New Yorker” this week, sort of an idealized picture of a horror, which is a guy in an Arab costume being pulled away to an airplane.  He‘s being taken to an airplane.

I‘ve always had that image in my head of a guy saying to a suspect or a terrorist, there are tougher places you could be right now if you don‘t give us the answer to that question.  Where were you on the 13th of March?  There are tougher places we could take you.  And he says, I‘m still not talking.  Next morning, they pick him up.  They haul him off to an airplane.  He‘s on a plane with a bunch of Americans who are holding—and he knows he‘s going to hell.  I always wonder what that—is that what it is like? 

MAYER:  That‘s just what it is like.  I couldn‘t believe that it was for real.  We use a—this country uses a Gulfstream 5 jet.  It‘s an executive jet. 

(CROSSTALK)

MATTHEWS:  Otherwise a nice way to travel. 

MAYER:  It‘s not bad, but except that, when you‘re put on that thing in handcuffs, a lot of times, they put them in diapers and they...

(CROSSTALK)

MATTHEWS:  And this guy is begging, right?  He is begging, please let me off this plane.  Or what is he saying?

MAYER:  Anything.  Right.  But, in one case, it was so strange.  They showed one of the suspects a thriller, a spy movie while he was up in the air.  And then he was delivered to Syria in that case, where he was tortured.

MATTHEWS:  And the Syrians who receive him are real henchmen, right?MAYER:  What‘s that?

MATTHEWS:  The people we have these renditions to are real hell. 

These are killers.  These are torture masters.

MAYER:  Well, I mean, in Egypt, there is a long history of torture.  This one guy, whose name is Mamdouh Habib, was—I don‘t know if you can say this on a family program, but he was threatened with being raped by dogs that they had trained for this. 

MATTHEWS:  Right. 

MAYER:  All kinds of horrible things happen. 

MATTHEWS:  They train dogs to rape guys. 

MAYER:  That‘s the allegation. 

MATTHEWS:  Well, that would be—probably stir your imagination, if nothing else. 

Now, does this ever work in this reporting you‘ve done?  Does it ever work to get an important truth out of a bad guy? 

MAYER:  I‘m sure it must work sometimes or they wouldn‘t do it. 

MATTHEWS:  Yes. 

MAYER:  But, at the same time, a lot of the times, you get lies out of people.  There was a famous case in this that I found where the suspect who gave the information to Colin Powell for his speech at the U.N. where he said there was a connection between al Qaeda and...

MATTHEWS:  And Iraq. 

MAYER:  And Iraq.  That suspect later recanted.  And he—when he gave him that information, it was while he was being sent to Egypt.  So, anyway...

(CROSSTALK)

MATTHEWS:  Anyway, Jane, you‘re a great reporter, obviously. 

MAYER:  Thank you. 

MATTHEWS:  Good work.  I‘m not sure where I stand.  It is a tough one, because I think torture may be sometimes necessary, although I don‘t want to be the one involved in it. 

Thank you very much.

When we return, election returns are being tallied in Iraq and so far the majority Shia have a big lead.  We‘re going to get the latest from HARDBALL‘s David Shuster.

You‘re watching HARDBALL on MSNBC. 

(COMMERCIAL BREAK)

MATTHEWS:  In Iraq, the vote counting continues and the Bush administration is trying to seize and strengthen what seems to be some foreign policy momentum. 

HARDBALL correspondent David Shuster joins us now—David.

DAVID SHUSTER, NBC CORRESPONDENT:  Well, Chris, the administration‘s top foreign policy officials have been stepping into the spotlight, giving some high-profile interviews, explaining their plans and producing an air of optimism at the beginning of President Bush‘s second term. 

(BEGIN VIDEOTAPE)

SHUSTER (voice-over):  On the heels of the Iraqi election, this weekend, President Bush‘s top foreign policy team took to the airwaves, declaring that freedom‘s march continues. 

DONALD RUMSFELD, SECRETARY OF DEFENSE:  I think people ought to step back and say, isn‘t that amazing?  Isn‘t that a wonderful thing for that region? 

DICK CHENEY, VICE PRESIDENT OF THE UNITED STATES:  We said we want freedom for the Iraqis.  We want a democracy.  We want them to pick their own government and write their own constitution.  And that‘s exactly what‘s happening. 

SHUSTER:  But what is also happening is that, based on the election results so far, it appears the new Iraqi assembly will be dominated by Shiite religious groups.  Most of the religious groups have close ties to fanatical Muslim clerics in Iran. 

And there are concerns in Washington about whether democracy in Iraq will lead to the exclusion of more secular Western-oriented voices.  In some Iraqi towns like Basra, religious Shiites have started demanding that women wear veils and that men follow strict religious doctrine.  And several of Iraq‘s Shiite religious leaders have already declared that Iraq‘s new constitution should be built around Islamic religious law.  It‘s a viewpoint the Bush administration hopes will not stick. 

RUMSFELD:  The Shiite in Iraq are Iraqis.  They‘re not Iranians.  And the idea that they‘re going to end up with a government like Iran with a handful of mullahs controlling much of the country I think is unlikely. 

SHUSTER:  Vice President Cheney, who has been the administration‘s leading hawk on Iran, reminded viewers the political process among Iraqis has just begun. 

CHENEY:  I think we have a great deal of confidence in where they‘re headed.  I don‘t think, at this stage, that there‘s anything like justification for hand-wringing or concern on the part of Americans that somehow they‘re going to produce a result we won‘t like. 

SHUSTER:  The strategy of trying to build on the good news has also been underscored lately by Secretary of State Condoleezza Rice.  In a high-profile visit to the Middle East, she focused on the Israeli-Palestinian conflict.  And the secretary of state praised the results of recent Palestinian elections and pledged a more involved U.S. role in peace negotiations. 

CONDOLEEZZA RICE, SECRETARY OF STATE:  This is a hopeful time, but it is a time also of great responsibility for all of us to make certain that we act on the words that we speak. 

(END VIDEOTAPE)

SHUSTER:  Because of the moderate statements lately by Israel‘s prime minister and by the Palestinian leader, both men have been invited by the Bush administration to the White House. 

And, Chris, this is yet another example of the Bush administration‘s effort to try to be very optimistic and upbeat, even as events across the Middle East are still unfolding. 

MATTHEWS:  What influence should we play here in trying to build a more secular government? 

SHUSTER:  Well, right now, the administration says hands off, let the process unfold, it will all shake out and, hopefully, there will be some sort of coalition featuring the Iraqi moderates that the administration wants to work with. 

MATTHEWS:  Is there a danger if this becomes a Shia-type government, a very Iranian-style government, that they will be advocating and supporting terrorism, like the Iranians are? 

SHUSTER:  There is that danger, but it‘s a danger the Bush administration says is too premature to try to worry about right now. 

MATTHEWS:  Well, people are worrying already. 

(LAUGHTER)

MATTHEWS:  Thank you very much, David Shuster.

Paul Krugman, Dana Milbank and John Fund on President Bush‘s budget and the second-term agenda when we come back.

You‘re watching HARDBALL on MSNBC. 

(COMMERCIAL BREAK)

(NEWS BREAK)

MATTHEWS:  Welcome back to HARDBALL.

Today, President Bush submitted his $2.5 trillion budget proposal to Congress.  The plan would eliminate or cut funding for, guess what, 150 programs from the federal budget.  And the Pentagon is the only department which would see a budget increase. 

(BEGIN VIDEO CLIP)

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES:  It is a budget that focuses on results.  The taxpayers of America don‘t want us spending our money on something that is not achieving results. 

It is a budget that reduces and eliminates redundancy.  It is a budget that is a lean budget. 

I fully understand that sometimes it is hard to eliminate a program that sounds good.  But by getting people to focus on results, I‘m saying to members of Congress, show us the results as to whether or not this program is working, I think we‘ll get a pretty good response. 

(END VIDEO CLIP)

MATTHEWS:  Ongoing military operations in Iraq and Afghanistan are not included in the budget, however, and neither is the cost of the president‘s plan to reform Social Security. 

Princeton economist Paul Krugman is a “New York Times” columnist and author of the book “The Great Unraveling: Losing Our Way in the New Century.”  John Fund is with “The Wall Street Journal”‘s OpinionJournal.com.  And Dana Milbank is with “The Washington Post.” 

Let me to go to John—Dana first. 

Dana, what is going to be the big noise tomorrow on this in the papers? 

DANA MILBANK, NATIONAL POLITICAL REPORTER, “THE WASHINGTON POST”: 

Well, obviously, we‘re going to do a whole bit about all the pain that is inherent in this budget. 

And it is the most serious cuts that we‘ve seen in the budget in many, many years, going back to the Reagan years.  On the other hand, as you point out, they left out not just Iraq, not just Social Security, but things like fixing the alternative minimum tax.  We‘re talking about hundreds and hundreds of billions of dollars that aren‘t included in here.  So, in a lot of ways, they have sort of jettisoned some of the more bad news that is to be expected and left that out of equation and made a lot of sort of happy assumptions in here. 

So, it‘s really—there may need to be more pain than is inherent here. 

MATTHEWS:  John, wasn‘t one of the problems of fiscal policy going back to the ‘60s and Lyndon Johnson was the chicanery, if you will, of not counting the cost of the war?  And here we have a decision by the president to offer the budget, which is a big document—it‘s the main document of the federal budget and the federal government each year—and not including the $80 billion he‘s going to add on in the supplemental, not including apparently the big costs we‘re going to run up in Social Security reform if we get it? 

JOHN FUND, COLUMNIST, “THE WALL STREET JOURNAL”:  For decades, budget have been political documents.  And they are used as press releases.

Chris, there are no budget cuts really in this document.  The 150 programs that are either cut or eliminated total less than 1 percent of the budget.  What‘s happening is a few programs are growing slower than they previously were, perhaps down to the rate of inflation.  But 81 percent of the budget, as Dana pointed out, 81 percent of the budget are entitlements, national defense or homeland security.  And they‘re not covered by this.  And they‘re exploding in growth. 

MATTHEWS:  Well, you‘re adding to my case, which is, this document is not an appropriate document if it‘s for educational purposes, even for the departments of the country.

Let me ask you.  I asked you the question, why isn‘t the Social Security proposals on this budget proposal? 

FUND:  Because they would look bad. 

MATTHEWS:  Why is...

FUND:  Because we have a ridiculous scoring system in the Congressional Budget Office and various other budget offices that don‘t take into account economic growth that are also political documents in their own right.

The problem is, the entire budget process has been politicized.  If your viewers really want to know what‘s going on, I‘ll just tell you.  The federal budget is continuing to go up. 

MATTHEWS:  Let me go back to the same point with Paul Krugman.

The president of the United States, is he repeating what Lyndon Johnson did back in the old days of the Office of the Budget?  Is he hiding the cost of war? 

PAUL KRUGMAN, COLUMNIST, “THE NEW YORK TIMES”:  Oh, it‘s much worse than that.  He‘s hiding the cost of war.  He‘s hiding the cost of alternative minimum tax, as you mentioned.  He‘s hiding the cost of likely expenses in other programs.  He‘s hiding the cost really of the tax phase-outs that are not going to happen because of the—this administration.

So, no, it‘s a deeply dishonest document.  And, by the way, it didn‘t always look like this.  Just look at—actually look at the document.  If you look at Clinton-era documents, they look like budgets.  This looks like a comic book.  This is silly stuff. 

Let me say, although the cuts are not a lot of money—this is the point.  A lot of huffing and puffing about, we‘re going to be austere.  It‘s not a lot of money.  It is actually quite savage on the things that it affects.  And there‘s a fine sense of priorities here.  We‘re going to see cuts in food stamps for working families.  We‘re going to see cuts in child care assistance.  We‘re going to see a squeeze on Medicaid that is probably going to lead to a large number of people being forced off medical care. 

And we have got some additional—even beyond making the tax cuts permanent, we‘re going to get some additional tax breaks for high-income families. 

FUND:  Mark McKinnon has said that all of the cuts in Medicaid are going to be plowed back to the states in other programs.  He is on record as saying that. 

KRUGMAN:  Yes.  Right. 

FUND:  Farm programs take the most savage cuts.  Farm programs, the environmental groups are thrilled by this program, because finally there will be a cap of $250,000 on maximum farm payments, most of which go to very wealthy farmers.

(CROSSTALK)

FUND:  So there are a few good policy changes in this country.

KRUGMAN:  Yes. 

FUND:  I also think they‘re going to try to force some reform in Amtrak, which badly needs it, and restrict it.  Most of the federal...

(CROSSTALK)

MATTHEWS:  I want to keep up with my question as to the war costs not being counted in the budget and the Social Security proposals not being counted in the president‘s budget. 

I want to go back to Dana, who covers Washington for “The Washington Post.”  Give me an assessment as to the pain factor here for the programs the president does intend to cut on the domestic side. 

MILBANK:  Well, the president is going to get a lot of credit here for showing a sense of fiscal discipline. 

The budget director, Josh Bolten, acknowledged today that a large number of these programs they are proposing to cut have in fact been proposed for cuts or for elimination and never happened.  So there‘s a lot of reason to believe that it won‘t actually happen again.  And we were talking about cuts to farm subsidies.  Rather unlikely.  Talking about holding Medicare cost increases to 5 percent a year—all of this extremely unlikely.  But who is to say otherwise? 

So it sounds like we‘re imposing a great deal of fiscal discipline at this time, but we have sort of redefined it.  We‘re now talking about nonsecurity discretionary spending, which is a tiny little thing.  If we were to say, I‘m defining the federal government by how many pencils I‘ve got in my drawer and I‘m only buying two this year, sure, I‘ve reduced it to three in the previous years. 

MATTHEWS:  Dana, when I look at the map, I‘m still looking at a red and a blue map, our divided country.  I think, although this is a generalization, a lot of the farm areas of our country are in red states, in the middle of the country, although there‘s some obviously milk production in Vermont and places like that, and tobacco production and cotton production. 

But, mainly, the red states reflect the abundance of our agricultural system.  Why would the president pass the buck to them? 

MILBANK:  Well, but there‘s more to come.  For example, we may yet get, with tax reform, the removal of the deduction for state and local taxes.  That‘s what people are saying is actually going to become a blue state tax.  So those of us in the blue states are going to get our share, too. 

MATTHEWS:  When is that coming? 

MILBANK:  Well, they‘re due to report in July.  So pay your taxes now.

MATTHEWS:  How will you be able to live in Massachusetts or New York or anywhere like Maryland? 

KRUGMAN:  Or New Jersey, by the way. 

MATTHEWS:  How would you be able to live in those states if you couldn‘t write off the state tax?  Because you also have a county tax thrown in, in addition to that. 

(CROSSTALK)

MILBANK:  We‘d be better off on a farm. 

(CROSSTALK)

FUND:  ... exercise fiscal discipline for a change, which they don‘t do.  Go to New York and go to Pennsylvania.  Those governments have exploded out of control. 

MATTHEWS:  And we would also have to close the ports where the people come in, too, because the poor people arrive in New York, right, and they stay on the East Coast and they cost money, right? 

FUND:  Everybody needs to go on a budget diet and no one really is. 

That‘s the bottom line.

MATTHEWS:  Let me ask you, is there any justification among you three gentlemen—anybody jump up who believe there is—for not telling truth in the budget?

You, first, John Fund. 

FUND:  I...

MATTHEWS:  Why doesn‘t president tell the truth about the cost of his dramatic proposal on Social Security, his increasingly expensive war?  If the war is necessary, why wouldn‘t he tell us the cost?  He doesn‘t have to be bashful here.

FUND:  Because the federal government has been taken over by P.R.  operators throughout the government.  Congress has been lying about the budget for years.  The president has been lying about the budget for years. 

Unfortunately, this is a bad habit.  And the only losers are the people who actually wants to know what is really going on.

MATTHEWS:  Does anybody want to demur on that, starting with you, Paul?

KRUGMAN:  Well, it‘s just not true that they all do it. 

It was in fact the case during the ‘90s budgeting was actually quite honest.  You can talk about all kind of things, but the fact was that the budget gave you a pretty picture of what was going to happen.  And the budget forecasts actually consistently came in more pessimistic than the reality.  So this is something new. 

(CROSSTALK)

FUND:  Because we had a tremendous economic boom, including dot-com bubble of the ‘90s, it might have been a little bit easier to perhaps put out a few better numbers.  But I‘m telling you...

(CROSSTALK)

KRUGMAN:  I‘m sorry.  Clinton did not hide huge chunks the way these guys...

(CROSSTALK)

FUND:  Leon Panetta admitted they used an awful lot of budget gimmicks.  And he is on record saying that. 

(CROSSTALK)

MATTHEWS:  Two wrongs don‘t make a right.

FUND:  no, of course not.  But to say Clinton good, Bush bad is to ignore reality.

KRUGMAN:  I didn‘t.  I said it hasn‘t always been this bad.  And that‘s the point.

MATTHEWS:  OK, let me go back.  Is this the worst budget dishonesty you‘ve seen, according to your view, Paul?

KRUGMAN:  Yes.  Yes.  There‘s been nothing like this. 

(CROSSTALK)

MATTHEWS:  Dana? 

(CROSSTALK)

MATTHEWS:  Being a Washington expert, I want you to be the referee here.  You were are “The Washington Post” representative...

(CROSSTALK)

MILBANK:  Chris, it‘s dangerous to get in between these two guys. 

MATTHEWS:  But it is the best process newspaper there is about Washington and how it runs.  Would it be a fair estimate to say that there is an unusual amount of chicanery at work here? 

MILBANK:  I think we‘re seeing progressively more chicanery.  But I don‘t believe it is one side or the other. 

I think we‘re just getting to the point—look, we have five-year time frame for things when it makes sense for the government to do that.  But if it makes it look bad, we‘ll go to a 10-year time frame. 

MATTHEWS:  OK.

MILBANK:  There‘s too many ways to game the system.

MATTHEWS:  So the new system is last in, most fallacious, right?

MATTHEWS:  Anyway, we‘ll be right back.

Coming up, will conservatives rebel against President Bush‘s guest worker program?  Immigration is always hot.  It‘s getting hot again.

And what is Howard Dean‘s plan to bring Democrats back from the wilderness? 

We‘ll be right back with John Fund, Paul Krugman and Dana Milbank.

And don‘t forget to check out Hardblogger, our political blog Web site.  Just go to HARDBALL.MSNBC.com.

(COMMERCIAL BREAK)

MATTHEWS:  How big a political risk is President Bush taking with his new plan on immigration?  We‘ll be back with Paul Krugman, Dana Milbank and John Fund when HARDBALL returns.

(COMMERCIAL BREAK)

(NEWS BREAK)

MATTHEWS:  We‘re back with Paul Krugman of “The New York Times,” John Fund of “The Wall Street Journal” and Dana Milbank of “The Washington Post.”

You start this time, John Fund, because you‘re eager on this question.  And the question is illegal immigration and how the Bush administration is handling it.  Does their plan allow people to come to this country and work without authorization, actual papers of immigration, green cards, if you will, does that solve the immigration problem? 

FUND:  Well, at least it would be a practical step which would get us a little bit beyond the complete mess we have now, where we‘ve got 13 million people without papers in this country. 

The Presaro (ph) program, which Eisenhower ran for the 1950s until the unions shut it down, cut the number of arrests at the border from 950,000 a year down to 50,000 a year.  It wasn‘t a perfect program.  There were some problems with it.  But the...

(CROSSTALK)

MATTHEWS:  That was only for people—excuse me—who are willing to come to America, pick up a check, perhaps working in the fields, taking that cash and heading back to Mexico or somewhere else with the money for their families. 

(CROSSTALK)

MATTHEWS:  But if a person wasn‘t willing to do that, but if a person wasn‘t willing to do that, who really wanted to move here, to live here and bring their families here, they still had to come in illegally. 

FUND:  An updated guest worker program, which would require that people go back after three years, which would be the longest term of employment—they would have to go back.  It would also give no advantage to anyone for citizenship if they already were here and had broken the law. 

Those basic principles—also, letting them keep their Social Security payments, which are now taken from them if they‘re on the books.  And they are not going to get those benefits.  Those are the principles which at least would ameliorate the problem.  Right now, we have two sides, two extreme sides, that frankly are not going to work. 

We‘ve got people who simply don‘t want to enforce the border controls.  And, of course, there are practical problems in doing that in a free society.  There are also people who basically want to ignore the problem.  And I think...

MATTHEWS:  For political reasons.

FUND:  For political reasons.  Both sides want to ignore the problem for political reasons.  And a lot of people don‘t want a solution.  A guest worker program along the lines the president said would help get us there. 

MATTHEWS:  OK.

Let me go to Paul Krugman. 

Isn‘t it true that both parties want the Latino vote?  It‘s very much up for grabs.

(CROSSTALK)

MATTHEWS:  And neither side wants to be known as a tough enforcer of the border.

KRUGMAN:  And it‘s—look, this is an issue that just cuts right at right angles to the usual political divide.  Both the left and the right are divided on this.  And I‘m kind of enjoying the spectacle, to be honest, because here you have got the two wings of the Republican Party, the cultural nativist America, America side and the cheap labor plutocrats, basically.

MATTHEWS:  Right. 

KRUGMAN:  Who are in conflict with each other.

And I think Bush is trying to find a way to basically serve the plutocrat constituency, while not making too much offense with the people who won him the election.  So this is—I‘m kind of taking some popcorn and watching this one. 

MATTHEWS:  But isn‘t it interesting—let me go to Dana Milbank—that you see a lot of anger about immigration, illegal immigration in California?  You don‘t see so much in Texas.  Is that what we‘re looking at here?  Simply all politics is local and the president doesn‘t have an experience of angry Anglos at too many illegals coming in around them? 

MILBANK:  Well, if he doesn‘t, he‘s about to get some.  I was watching the State of the Union, the response on the Republican side.  Even Social Security didn‘t split them like this.  Half of them are sitting on their hands and half of them are cheering wildly. 

So, as Paul was saying, it really a splitting away the business crowd from the other conservatives.  And, indeed, this is an issue—and let‘s give him credit for it—where Bush does feel personally strongly about it.  It may also coincide with the Chamber of Commerce.  But this is something that has been at his heart for a long time.  And he‘s going to do it even though it may have a real political cost to him. 

FUND:  Chris, I‘m from California. 

I can tell you one of the differences between California and Texas.  In California, there certainly are an awful lot of illegals who get public assistance, who use public hospitals.  Texas controls that a lot more.  Obviously, they go to public schools.  That‘s a federal mandate.  But Texas tries to assimilate them.

MATTHEWS:  Right. 

FUND:  And California has a lot of multiculturalists who try to teach them bilingual education, which prevents them from learning English and doesn‘t let them assimilate. 

MATTHEWS:  Why do we call them undocumented workers?  Why not illegal aliens? 

FUND:  I just called them illegals. 

(CROSSTALK)

MATTHEWS:  So many people say undocumented, like, I left my driver‘s license at home.  It is not a question of not having the paper.  It is a question of being in the country illegally. 

FUND:  We cannot build a Berlin Wall to keep people out.

MATTHEWS:  Right. 

FUND:  But let‘s at least use the English language properly. 

MATTHEWS:  And why don‘t Republicans support a national I.D. card that works, so we could stop this right now?

FUND:  Because it frankly would involve biometrics.

MATTHEWS:  What‘s wrong with that?

FUND:  Or something that would really be intrusive and...

MATTHEWS:  Well, there‘s a solution.  So the solution is the problem here.  You would rather have illegal immigration than have national I.D.  cards.  So your solution is, no national I.D. card, illegal immigration.

FUND:  When Dianne Feinstein from California proposed that, she was shot down by her own fellow Democrats. 

MATTHEWS:  Well, Dianne was right.

When we come back, a beer maker salutes U.S. troops in a TV commercial during the Super Bowl.

More with Paul Krugman, Dana Milbank and John Fund when we come back.

You‘re watching HARDBALL on MSNBC. 

(COMMERCIAL BREAK)

MATTHEWS:  We‘re back with Paul Krugman, Dana Milbank—Dana Milbank

·         and John Fund.

Let‘s take a look at an Anheuser-Busch ad saluting the American troops which ran during the Super Bowl. 

(BEGIN VIDEO CLIP, ANHEUSER-BUSCH AD)

(MUSIC)

(APPLAUSE)

(MUSIC)

(END VIDEO CLIP)             

MATTHEWS:  Paul Krugman, that was an Anheuser-Busch ad yesterday at the Super Bowl. 

In or out?  OK to use patriotism...

KRUGMAN:  No.

MATTHEWS:  ... and the inspiration we felt in that ad to sell beer?

KRUGMAN:  No.  I mean, support the troops.  Don‘t use them to sell beer. 

It‘s—you know, we all feel—we all support the troops.  But this

·         this is exploitation.  And it‘s part of the basic lack of seriousness about a lot of what‘s going on in this country. 

MATTHEWS:  Could it be that Anheuser-Busch was rendering a public service by creating a stirring portrait of what might have happened? 

KRUGMAN:  Oh, come on.

MATTHEWS:  Those were real soldiers, by the way. 

KRUGMAN:  Yes.  Nonetheless, it‘s business.  You don‘t spend money—if you really wanted to support the troops, you would just do it without making it clear that this was from a beer company. 

FUND:  Chris, running the corporate name is something everyone does, including public broadcasting. 

There was no picture of a beer can at the end of that ad.  It just said Anheuser-Busch.  There‘s nothing wrong with letting people know that they wanted to have this sentiment.  There wasn‘t a beer can placed in any of the airport...

(CROSSTALK)

MATTHEWS:  Once again, I go to Dana Milbank.

FUND:  Come on.

KRUGMAN:  Come on.

MATTHEWS:  ... for strict analysis.

Dana, to break this tie with hard reportage, is it possible to distinguish between an ad to sell beer and a company that has ads trying to actually to salute the country in its missions? 

MILBANK:  Well, that‘s fair. 

Look, the troops have been exploited since the landing on—the president‘s landing on the aircraft carrier.  So what is wrong with a beer company doing it now?  The real crime is that the troops in Iraq aren‘t allowed to have a Budweiser. 

MATTHEWS:  What about Michael Douglas yesterday?  Everybody OK with his salute to the troops at the—middle of the stadium right before the game started? 

FUND:  I must have been out of the room. 

MATTHEWS:  I was there. 

KRUGMAN:  I didn‘t get it. 

MATTHEWS:  Well, it was very dramatic.  And I was cheering like everybody else.  So I say it‘s OK, OK?  Because it was.  Everybody cheered.  It was really about the troops.  It wasn‘t about the wars. 

But let me ask you, speaking of the wars, Paul Krugman.  A man of your intellect might be able to see forward.  Are we going to Iran next? 

KRUGMAN:  Don‘t have the troops.  I mean, it comes down to that.  Right now, our policy is to speak loud and carry a twig.  We just don‘t have the wherewithal.

MATTHEWS:  No lightning strikes on the potential nuclear installations in Iran? 

KRUGMAN:  Unfortunately, the Iranians know about that.  And so we might get some.  But everybody has tried to game this.  There‘s been a lot of war games at the Pentagon and elsewhere trying to see, now, what—how could this work out?  And the answer is, it can‘t. 

(CROSSTALK)

FUND:  Chris, Condoleezza Rice...

MATTHEWS:  John.

FUND:  ... is emphasizing public diplomacy. 

We‘re going to take the number of hours we broadcast into Iran from an hour to four and a half hours a today. 

MATTHEWS:  Can we stir things up to get the seculars, the more moderate people, to push the mullahs aside or just make them more... 

KRUGMAN:  I mean, the reality is that...

FUND:  There will be...

MATTHEWS:  Go ahead.  Go ahead, Paul.

KRUGMAN:  The reality is that the mullahs are taking over Iraq, probably kinder, gentler mullahs, but, basically, we have installed a soft Shiite theocracy in Iraq. 

(CROSSTALK)

KRUGMAN:  They‘re the ones who are winning this, not us. 

MATTHEWS:  Let me ask Dana. 

Does the threat of an America action against your country, in this case Iran, solidify people right and left, secular and religious, old and young, against us? 

MILBANK:  Well, it is hard to imagine that they‘re taking it seriously.  After the president‘s inaugural address, the first thing White House aides did was say, wait a second.  It was just an idea.  He doesn‘t really mean actual action behind these.

MATTHEWS:  Right. 

MILBANK:  So if the Iranians are perceiving action, they‘re not looking at the right thing. 

(CROSSTALK)

MATTHEWS:  Yes, I know.

And when you say you‘re not on our agenda to attack, I thought that was kind of an amazing comment. 

FUND:  Chris, you know from South Africa to Ukraine, history is replete with regimes that looked completely strong and ultimately were crumbling from within. 

MATTHEWS:  Yes.  I know.

FUND:  So, when the Iranians crack down, it could be a sign of weakness.

MATTHEWS:  I‘ll give you a bigger one, the Soviet Union. 

(CROSSTALK)

MATTHEWS:  Anyway, thank you, Paul Krugman.

KRUGMAN:  Thanks a lot. 

MATTHEWS:  Thank you, John Fund.  Thank you, Dana Milbank, of “the Post.”

Tomorrow on HARDBALL, I‘ll talk to journalist Jim Dwyer, co-author of “102 Minutes: The Untold”—and it is untold—“Story of the Fight to Survive Inside the Twin Towers,” that terrible morning.  And on Wednesday, reality TV mogul Mark Burnett joins us.

Right now, it‘s time for the “COUNTDOWN” with Keith Olbermann.

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

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