Interview of the Vice President by Lawrence Kudlow, Kudlow & Company, CNBC News

Ceremonial Office

Dwight D. Eisenhower Executive Office Building

10:50 A.M. EDT

Q: Mr. Vice President, welcome back to Kudlow & Company, sir.

THE VICE PRESIDENT: It's good to be back, Larry.

Q: Let me begin with the latest. The administration really turned the heat up on Iran, freezing all the banking assets for the Revolutionary Guard and the Quds. At the same time, as you know, oil prices have jumped to $92-$93 a barrel. Let me just ask you this: What is the issue here regarding oil? Would you use the Strategic Petroleum Reserve, knowing that there may be additional actions in the Middle East?

THE VICE PRESIDENT: Well, the Strategic Petroleum Reserve there is primarily, obviously, to deal with an interruption in supply. Lots of times there have been discussions. In fact, back in the Clinton administration, it was used to try to manage prices -- that's not what it's for. And we've recommended expanding the petroleum reserves, Strategic Petroleum Reserve; we think it's important to do that. But it's a classic case that we're faced with right now, to the extent that you do get unrest or potential problems in the Middle East. Our reliance on foreign sources of energy creates a certain vulnerability. The best short-term response we have for that is the Strategic Petroleum Reserve.

Q: Would these financial sanctions wind up in some sense preventing Iran from exporting oil? I think they're still selling about 3 million barrels a day.

THE VICE PRESIDENT: They are.

Q: Would they apply there at some point?

THE VICE PRESIDENT: I don't want to forecast that now. What we did yesterday, obviously, was focused on the IRGC, the Iranian Revolutionary Guards Corps, and the Quds Force, which is part of that. And the emphasis is upon their activities with respect to proliferation, to ballistic missile technology, as well as the support for terror that Quds Force provides in many places in the Middle East: Hezbollah, Hamas, their activities in Iraq, and Afghanistan as well, too.

Clearly the Iranians want to sell oil. They do sell oil into the international market. That's an important consideration, but from our perspective it's very important that if you're going to do business with Iran, you're going to have problems doing business in the United States.

Iran is a threat on many fronts in that part of the world. In Lebanon they've been actively working through the Syrians to try to topple the government of Lebanon. They are making significant problems for us in Iraq and in Afghanistan, where they're providing explosively formed penetrators and training and so forth to help the Taliban in Afghanistan and some of the Shia insurgents inside Iraq. Plus, obviously the big issue is the fact that they are working aggressively to develop the capacity to enrich uranium, and the end of that process will be the development of nuclear weapons.

Q: Let me just take this oil issue a little further out. Years ago in late 2000, early 2001, when you were first elected, you said the U.S. economy was on the front end of a recession. You were way ahead of the whole economics fraternity; you called that recession. I gave you the Forecaster of the Year Award, as I recall back in 2001.

THE VICE PRESIDENT: I remember that.

Q: Yes, it was quite a distinction. And I want to ask you, is there a sense, in your mind or the President's mind, at what point the rise in oil price really pushes us over the edge into a recession? Economists have failed to predict this. They've said, you know, $50, $60, $70; now we're approaching $100. Is there a break-even point?

THE VICE PRESIDENT: I couldn't forecast a break-even point on that, Larry. I think -- a couple a points I'd make. Number one is I think our economy has been amazingly resilient to what's happened to oil prices over the last couple of years. Clearly there's been a major increase in oil prices, and the economy has adapted to it and adjusted very well. I think part of that is the fact that we're twice as efficient now as we were 10 or 12 years ago with respect to how we use energy; that is, we get much more by way of economic output per unit of energy input than we ever have before. We're just getting better and better and more efficient all the time. So it hasn't had the impact that it might have had, say, 20 or 30 years ago, as it did back in the '70s, for example, when we all remember what happened at that time. So I am not here today to forecast that we're going to have an oil-driven recession. I wouldn't say that. I don't see that, but I'm not an economist. I go to the same people you go to looking for forecasts.

Q: Well, you have a better track record than most people, honestly. That's why I asked.

THE VICE PRESIDENT: Well, I'm one for one and I'll stay with a perfect record as long as I don't do it again.

Q: Yes, one-time in-a-row is a fabulous forecasting record. But let me ask you more on the economic outlook. The housing recession has clearly deepened; really not a piece of evidence suggesting otherwise. The sub-prime credit virus in the banking system has deepened. I would dare say both the Fed and the Treasury, Mr. Bernanke and Mr. Paulson, underestimated the virulence of this housing problem. How do you see it, and inside the White House councils, how much of a recessionary worry from that is there?

THE VICE PRESIDENT: Well, we look at the same forecast everybody else does, basically. And I had lunch with Hank Wednesday of this week. We've got a group that meets every Wednesday inside the White House that focuses on the economy and economic policy. I think we are -- what we're seeing is a bit of a slowdown here, but the forecast I see for next year indicate continued growth. And I think clearly there have been -- there's been a significant adjustment for us in terms of what's happened in the housing market. But I think we're far short of a point where we'd say that a recession is just around the corner. I don't think it is, but again I rely upon the professional advice that we get from our economists, as well as what we see in the blue chip.

Q: You satisfied with the Federal Reserve's response? So far they cut rates once by 50 basis points. They meet again this coming Wednesday. Are you satisfied with the Fed?

THE VICE PRESIDENT: The Fed makes Fed policy, and we generally refrain from editorial comments on what they're doing. I'm somebody who has a great respect for Ben Bernanke. I think he's a good Chairman. We all worked with him closely before he became Chairman of the Federal Reserve, and I think the Fed's doing a good job.

Q: Are you worried that the dollar has fallen too low? I mean, you can hardly get through a day in the financial news without reading about the dollar setting a new low. Does that bother you? I mean, when I worked for President Reagan many years ago, he used to say a great country needed a strong and reliable currency. Does this dollar story bother you?

THE VICE PRESIDENT: We think the key -- we do believe in a strong dollar, but we think the key is that it be allowed to adjust based on market forces out there, and we think that's in fact what's happening.

Q: President Bush is speaking today, this morning, about his unhappiness with the congressional appropriations process and spending overruns. He's already vetoed the SCHIP bill. He's kind of become the budget warrior this year. What can you say about that?

THE VICE PRESIDENT: Well, he's doing it and he's enjoying it. He did veto the SCHIP bill. The House yesterday passed another one that is veto bait, as well. Congress hasn't done anything to improve it.

Q: Veto bait?

THE VICE PRESIDENT: Is veto bait. And the fact is, the Congress spends time re-passing legislation that he's already vetoed once. He sustained the -- that veto; we had the votes to sustain an override -- to avoid an override and sustain the veto. And their response is to come right back and do it all over again, wasting more time. They've got something like 19 legislative days left if they're going to meet their target adjournment date in mid-November. And they have yet to pass us for -- their signature, to get to his desk, a single appropriations bill.

This is -- you've got to go back 20 years to find a time when the Congress was as inefficient as it is today. They're not doing their business. They're postponing action on the supplemental for Iraq. Their general approach, I think, has been remarkable in terms of not producing any benefits, not moving on the things that we need to be moving on.

Q: In your judgment -- let's go back to that supplemental. It's about a $50 billion supplemental. The Democrats have, from time to time, threatened to stop appropriations for the war as part of their anti-war efforts. Where do you stand on this supplemental? Are the negotiations in the backdrop, or is this going to be larded with pork? Might it be a veto bait? Where is this going to come out?

THE VICE PRESIDENT: Well, the reason for the supplemental is to pay what's necessary in order to be able to sustain the troops in the field, to be able to continue our operations in the global war on terror and Afghanistan and Iraq. And it's absolutely essential that it get passed. And when Congress says, well, gee, we don't have time to deal with it now, we're going to lay it over and take it up next spring -- it strikes me that's a classic example of them not stepping up and taking responsibility for a very important piece of business that they are responsible for. They've got to appropriate that money.

I think it may partly be tied up with their attitude towards the war, but the fact of the matter is, we are succeeding in Iraq, we are making significant progress. We do need that money. It goes to support the troops in their endeavors. And it's a bit hypocritical on the part of the Democrats to say they support the troops, but, oh, by the way, we're not going to pass the money or appropriate the funds that are needed in order to be able to sustain their activities. This is money for equipment, for pay, for all of those things that go into maintaining a first-class fighting force. And the Democrats are trying to duck it.

Q: Some of the political pundits are saying, well, okay, President Bush has become "budget warrior" with his veto pen; he's also become very, very aggressive on preserving the low tax rates. He calls himself a supply-sider. I've not heard him use that term before; I was glad to hear it. But I was interested, all of a sudden it surfaced this year. Is Mr. Bush and are you trying to sharpen the Republican message for 2008? You're trying to say, here's our contrast: Veto excessive spending, keep tax rates low? Is this in large measure a political strategy?

THE VICE PRESIDENT: No, I think it's a -- I think it is a strategy driven by policy, and our policy concerns. I think that's good politics. But I think if you look at it -- in effect, what happened, of course, was for the first six years we were here, we had the Republican Congress. We negotiated on the top line on budgets every year. The Congress met our top lines, sometimes in the face of a veto threat. And so there was no opportunity or necessity to have vetoes as an important part of your strategy.

Q: Do you think that was a mistake, looking back on it?

THE VICE PRESIDENT: No, I don't. You had to negotiate with the Congress. Denny Hastert was not going to sign us a bill the President would veto. So we sat down and we'd negotiate on a top line, and they, in effect, came into agreement in virtually every case. Now we're in a situation where they're trying to pass a budget, for example, for this year, that's $22 billion over our top line. We've made it clear we will veto it. They sent us the SCHIP bill, we vetoed it. They send us another SCHIP bill, we'll veto it. It's not just politics, we think it's good policy.

The other thing we've got, of course, on tax policy, is there is a fundamental difference between the parties in terms of how we look at the world with respect to tax policy. We had -- you had Charlie Rangel on your show last night. Charlie is a good guy; I like him; served with him for 10 years in the House; respect him as Chairman of the Ways and Means Committee.

Q: You and he have had some words in the past, as I recall.

THE VICE PRESIDENT: Well, we have, but it was good-natured.

Q: What did you think of his mother-of-all-tax-reform plan?

THE VICE PRESIDENT: Well, I don't like it. I think it's bad in several respects. It raises the rate on capital gains. It raises the rate on dividends. It raises the top rate on the income tax. Those are terrible ideas. Those are all rates we reduced when we came in, in 2001 and 2003. They've been absolutely crucial to driving this economy and to creating the incentives out there for businesses to invest and to create more jobs and more wealth. They're the prime reason we've seen an increase in tax revenues. And also the fact that we've got a deficit next year that's 1.2 percent of GDP, which is half what the deficit has been over the last 40 years. That's good tax policy, and Charlie wants to change it.

Q: How about his proposal to lower the corporate tax rate? You got to give him some credit, I think. I mean, he comes with this -- I think in a good sense he's trying to help our companies --

THE VICE PRESIDENT: Well, I think he may be. We'll see. Maybe that's trying to suck a few people in. But when I see him raising the top rate on individuals, and recognize that about three-quarters of the people who pay the top rate are small businesses -- and small businesses more than corporations drive job creation in this economy -- it's a fundamentally bad idea to go back and reverse course on that top rate on dividends and on cap gains. And I'll give Charlie credit, he wants to reduce the corporate rate, okay, but he's doing an awful lot of damage in the name of what he describes as tax reform. I think it's a bad proposal.

Q: You were talking before about the success of the tax cuts, and so forth. On the campaign trail, many Democrats -- Senator Clinton, in particular -- have said two things. Number one, middle class does not participate in this economic boom. She calls it a "middle class trap door," and says that wage inequality is the worst it's been since 1929. Do you have a response to those charges?

THE VICE PRESIDENT: Yes, I don't agree with it. I think that analysis is wrong. I think we've added well over 8 million jobs since the recovery took off some four years ago. We have seen a significant economic expansion underway now for 40-some months. It's been, I think, a very successful economic policy. And the suggestion that somehow it's hard times out there, I just -- I think is a misstatement. Clearly, there are pockets where people run into difficulties, where we have economic slowdown for one reason or another -- Michigan is still having troubles because of the auto industry and so forth -- but I think overall, in terms of macroeconomic policy and what's worked for the economy for the last several years now, it's what the President put in place, not what Senator Clinton suggested.

Q: But there is a middle class anxiety, and it is going to be an issue in the upcoming presidential election. Do you think the White House and the Republican Party in general has had a sufficient response to that anxiety? Some of it's about trade, some of it's about globalization, some of it's about transforming our economy -- what the eminent economist Schumpeter called "gales of creative destruction." I mean, people are a little worried out there. Do you agree with that? Do you think there's been a sufficient response to it?

THE VICE PRESIDENT: I think we need to do an aggressive job, as a party -- the administration and our friends in Congress -- at emphasizing what we have done that has worked so well, with respect to tax policy and economic growth and so forth, and what will happen if the Democrats take over.

It's not a mystery. You can look at what Senator Clinton believes in and how she voted. You can look at Charlie Rangel's proposals with respect to tax policy. And the Democrats basically want to spend more money, they want to raise taxes. It's basically an anti-growth policy. It's exactly the opposite of what the Republicans have been providing for the last several years. That's a fundamental difference. They're entitled to their beliefs.

What we have to do -- as you say, I think we need to work very hard to make our case so that the American people understand both the benefits of what's occurred, what we've done out there, as well as the problems, the price that will be paid if the Democrats take over.

Q: Speaking of another Democratic frontrunner, you and Senator Obama are apparently related. This information comes from your wife, Lynne, who appeared on our program not too long ago. Mareen and Susan Duvall, immigrants from France -- have you spoke to Mr. Obama about this shared experience?

THE VICE PRESIDENT: Cousin Barack? (Laughter.) No, we haven't -- haven't had the opportunity to talk about it.

Q: You haven't once called him up, and say, well, heck, the family tree --

THE VICE PRESIDENT: No. Well, I didn't know whether that would help him or hurt him, so I thought I'd probably stay away from him, so. (Laughter.) But apparently we do have a common ancestor, about eight or nine generations back.

Q: Mr. Vice President, thanks once again for coming on the program.

THE VICE PRESIDENT: Well, thanks, Larry, enjoy the show.

END 11:09 A.M. EDT