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SYNOPSIS:

MADDOW: Yes, the deregulation and tax cut crowd -- the crowd that brought us huge deficits and near economic collapse, they are now proposing -- surprise -- more tax cuts as the solution to this current crisis. Fortunately, that crowd lost. They lost badly in the great economic ideas referendum known as the 2008 election. And, fortunately, the president found his voice on that point today.

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OBAMA: In the past few days, I`ve heard criticisms of this plan that frankly echo the very same failed theories that helped lead us into this crisis in the first place -- the notion that tax cuts alone will solve our problems. I reject these theories. And, by the way, so did the American people when they went to the polls in November and voted resoundingly for change.

(APPLAUSE)

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MADDOW: Joining us now is Nobel Prize-winning economist and "New York Times" columnist, Paul Krugman. He`s the author of the new book, "The Return of Depression Economics and The Crisis of 2008." Mr. Krugman, it`s a pleasure to have you back on the show. Thanks for joining us.

PAUL KRUGMAN, NEW YORK TIMES: Good to be on again.

MADDOW: We know that reregulating Wall Street is coming. But the stimulus bill comes first in Washington. What is your response to the Republicans` insistence on tax cuts being the bulk of the stimulus?

KRUGMAN: Well, yes. I mean, we sort of tried that for the last eight years, right? It didn`t work so well. And no, there`s very good economic theory that says that tax cuts are very inferior form of doing this. The problem is there is not enough spending in our economy. There is not enough demand to keep people employed. Give people tax cuts, especially give relatively affluent people tax cuts, they probably going to hang on to most of the money, not spend it. It doesn`t do very much. You run up a lot of federal debt but you don`t end up doing very much stimulating. And that`s why spending, you know, there are various forms that spending can take, but actually, getting the money out there, laying it out, aside from the fact that we need this stuff the government can give us here, it`s also a better way of getting the economy moving.

MADDOW: I sort of feel like you and other prominent economists in the country deserve some sort of public interest credit of your own for having to explain that point over and over and over again.

KRUGMAN: I sometimes think we`ve returned to the Dark Ages here. We have forgotten the stuff that our grandfathers learned and it sort of disappeared from our memory and somewhere hidden in the monasteries of the manuscripts with all this ancient knowledge.

MADDOW: Or hidden in Econ 101 textbooks in the first chapter.

KRUGMAN: Yes.

MADDOW: I mean, it`s basic economic literacy. Maybe we don`t have basic economic literacy the pro-tax cut arguments are working. I mean, the Republicans are almost dominating the debate when you look at the popular discussion about the stimulus plan and we are starting to see their position reflected even in public opinion polls.

KRUGMAN: Yes, I think this is partly bad media coverage. It`s partly that, you know, they have a simple point to hammer. And I have to say, until today, Obama and team were a little bit of sort of -- they were so busy trying to change the tone in Washington that they weren`t, you know, focused on the main thing which is to get this economy moving.

MADDOW: The Madoff whistleblower today, Mr. Markopolos. He said today that the SEC, the Securities and Exchange Commission, essentially would lose in a math contest with Mr. Ed. He described them as completely feckless. Is regulation in the financial industry really that lame?

KRUGMAN: It`s pretty bad. You know, it`s not -- if you spent 30 years saying that government is always the problem never the solution, if you spent 30 years castigating government bureaucrats, you know, many of whom are actually -- we need bureaucrats -- and if you under-fund these agencies, if you make government the place where smart people don`t go, because, hey, it`s got bad rep and furthermore, it pays so much less than being on Wall Street, being a malefactor of great wealth, then you have to expect that the whole apparatus is not going to work. So, in the case of the SEC, they had the authority, the rules were there, but we had degraded, you know we FEMA-fied it, we`ve degraded so much that it couldn`t do its job.

MADDOW: When did that degrading start?

KRUGMAN: Oh, it really goes back to Ronald Reagan. And you really want to -- this began in 1981, and it`s taken place over the years. And while there was some improvement during the Clinton years, Clinton didn`t have Congress on his side and wasn`t able to make the kind of break in that trend. So, really we had, it`s almost 30 years now of degrading these things, and eventually, these are the consequences.

MADDOW: If the stimulus bill gets passed and if the president keeps up the line that he was -- that he got great applause for today .

KRUGMAN: Yes.

MADDOW: If the stimulus happens, he kills the tax cut folly that could screw up that plan, what should be next on the agenda, in your opinion?

KRUGMAN: Well, financial rescue. That`s the other thing. You know, we do -- we are busy constraining the paychecks to these executives but we actually, meanwhile, have a failing banking system and, you know, the new administration has not been very good at coming out with a plan that makes sense to anybody. And they need to do that. So, I mean, the immediate thing is we have stop this freefall in the financial system and the economy. Stimulus bill takes care to some extent -- I don`t think it`s big enough -- but it takes care of the demand side, but we need to work on the financial side. And we also then have to do reregulation of the financial markets which we need to do while the crisis is still fresh in our minds. We don`t wait until everything is fine before trying to do fix it because at that point, the industry lobbyists will make sure that nothing happens.

MADDOW: So, big stimulus, clearly explained, well thought out financial system retrenching and rescue.

KRUGMAN: Right.

MADDOW: And then, getting regulation back on track. (INAUDIBLE).

KRUGMAN: Yes. And next month, some other stuff.

MADDOW: Yes, exactly.

(LAUGHTER)

KRUGMAN: It`s a huge agenda but it has to be done. And then, you know, the world is depending on it.

MADDOW: And then you have flying cars and then you know, we get to work on everything else.

KRUGMAN: Right.

MADDOW: Paul Krugman, Nobel Prize-winning economist, "New York Times`" columnist -- it`s always such a pleasure to have you on the show. Thank you, Paul.

KRUGMAN: Great to be on. Thanks.

MADDOW: In 1995, Senator Judd Gregg of New Hampshire voted to abolish the Department of Commerce. In 2009, Democratic President Barack Obama chose Mr. Gregg to be the head of the Department of Commerce? This fact alone should create an electrified fence between this man and that job. But apparently -- no. Got to be bipartisan, got to reach across the aisle. Did I mention Judd Gregg`s links to convicted uber-lobbyist Jack Abramoff? Yes, we`ll talk about that next. Later, I will have the latest on the American women`s badminton team in their trip to Iran. THE RACHEL MADDOW SHOW striving, of course, to be the cable news leader in international women`s badminton news. But first, it`s time for another installment of our tragic comic series, tracking the Republican Party`s search for meaning in the minority. It`s the GOP in exile.

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Originally broadcast, 2.4.09