Page last updated at 14:55 GMT, Monday, 11 October 2010 15:55 UK

Mitch Daniels: US faces 'survival-level' economic threat

Governor Mitch Daniels on why he believes the stimulus is not working

Newsnight's Paul Mason meets Mitch Daniels, the Republican governor of Indiana who is tipped to challenge Barack Obama for the US presidency in 2012.

"America faces for the first time, other than the nuclear threat of a few decades ago, a genuine survival level issue," Mitch Daniels says.

"My reading of history is that there are points of no return, past which nations will not recover to anything like their previous strength."

It is apocalyptic language, and since Mr Daniels is widely regarded as having a decent chance of becoming the next US president, all the more alarming.

On Newsnight on Tuesday 12 October 2010 Paul Mason reports on America's poorest city, Gary, Indiana and the problems gripping the US economy - Tuesday 2230 BST on BBC Two, then on the BBC iPlayer and Newsnight website
On Newsnight on Wednesday 13 October 2010 Paul Mason reports on how the recession has ripped through America's middle classes - Wednesday 2230 BST on BBC Two, then on the BBC iPlayer and Newsnight website

The threat the country is facing, according to Mr Daniels, is that of national bankruptcy.

Burdened by its $14tn debt, hemmed in by currency manipulation and trade rivalry, crippled - as Mr Daniels sees it - by a government whose size is sucking the lifeblood out of the economy - the US is, he believes, approaching a point of no return.

But towards what, I ask him, perennial decline?

"Decline might not be the right word. It might be very abrupt, very sudden. I am not predicting that but it cannot be excluded," he says. "My sense is that we'll have to do things in this country that the political smart money said you can't do."

When he worked as budget director for the Bush administration, President George W Bush called him "my man Mitch" and nicknamed him The Blade for his budget-cutting zeal.

But in the first three years of the Bush presidency, Mr Daniels saw the collapse of America's public finances from a $230bn surplus to a $400bn deficit.

Scathing criticism

He has done a better job with Indiana - since becoming governor of the Midwestern state in 2004 he has balanced the books through tax cuts, spending cuts and America's biggest ever road privatisation deal.

Mitch Daniels on whether he will run for the US presidency in 2012 as many predict

Now, although he will not commit in public, he is tipped as a potential Republican candidate to run for the presidency against Barack Obama in 2012.

When I meet Mr Daniels, amid the echoing marble of the Indiana Statehouse, he is scathing about the results of the Obama fiscal stimulus:

"Sad to say, it was ill designed - they didn't learn from their mistakes," he says.

"As someone who thought it was worth a try at the beginning… I think there was poor judgement in the way they went at it. I think of it as trickle down government, in which the vast majority of funds were simply poured into this growing government edifice.

"So we've had this perverse outcome where the private sector has continued to shrink and the government sector has got bigger, and that's not a good formula for long-run success".

Meagre results

Unlike some Republican governors, who refused to take the stimulus money outright, Mr Daniels took most of what was on offer.

President Barack Obama
The Congressional Budget Office says Obama's fiscal stimulus has saved jobs

But at state level he has placed strict limits on what cities and counties in Indiana can spend the stimulus money on. Much of it has gone on road renovation, with a hefty dollop allocated to projects in education.

The results are meagre - according to federal data, Indiana has spent $4bn of the $787bn stimulus, but the result is a mere 10,000 jobs.

Is he satisfied?

"Of course not, and I would also caution you that I have full confidence the $4bn figure is right and no confidence that the 10,000 figure is right - nobody knows.

"I told our people 'we'll fill out their paperwork, we'll be as faithful as any state in trying to carry out this law, but don't let me catch you writing down some fictional jobs number because we're not going to know'. They don't know."

The Congressional Budget Office believes Mr Obama's fiscal stimulus has "created or saved" between 1.5 million and 3.4 million jobs.

Call for new plan

It is a figure that does not assuage Americans' anxiety when the official figures show 15 million unemployed, 50 million without health insurance and the median income has fallen by 4.2% since December 2007.

You can't run a family, you can't run a company, you can't run a government, even a government with the power to print money, at these debt levels that we have and are headed for, so we have to do dramatically different things
Indiana Governor Mitch Daniels

The failure of the stimulus to re-start the US economy prompted Mr Daniels to issue a call for a new, very different type of stimulus last month - an $862bn cut in payroll tax, paid for by a federal wage freeze, a hiring freeze, a cut in federal spending and the withdrawal of some bank bailout funds.

"We can have the philosophical debate tomorrow," says Mr Daniels. "I happen to think [big government] is wrong - I think it leads to a diminution of freedom which is the idea around which America has always been organised.

"But I say to people, let's have the ideological debate another time - today it's the arithmetic that doesn't work.

"As we've found out from a searing experience, you can't run a family, you can't run a company, you can't run a government, even a government with the power to print money, at these debt levels that we have and are headed for, so we have to do dramatically different things."

UK coalition echo

Mr Daniels repeats the argument that the UK coalition government has used - that cutting the size of the state sector, and cutting the deficit, far from depressing the economy should unleash it.

But in US terms his views on almost everything else - from abortion to foreign policy - are classic Bush-era mainstream.

Tea Party supporters
The Tea Party movement roared onto the political scene last year

This makes Mr Daniels almost the laboratory test case for mainstream US conservatism's reaction to the Tea Party movement, which is increasingly able to dictate both candidates and policies to the Republican party.

How does he react to the newfound momentum of this overwhelmingly white, plebeian movement?

"I'm not so worried as some are. Yesterday someone asked me 'Is this a civil war?' No - it's growing pains. There are new people coming or considering coming to the Republican party, their views overlap, but are not 100% consistent.

"If our party is going to be trusted again with national leadership, it's going to have to look different, it's going to have to present itself differently to the American people - so I think it's only natural to have a little self-definition exercise before we presume to ask our fellow Americans."

Tea Party rhetoric

But where does he stand within that exercise? Is he comfortable with the image of enraged, working class masses marching the streets to "take our country back"?

"I'm glad you use the word image, because it's not the reality," he says. "First of all, a little creative hell-raising on behalf of freedom is not a bad thing. What you've seen here is a healthy reaction to extremist national policy.

"Now, here's what is fair to say, when the confetti's fallen and I think quite appropriate alarms have been raised, I think at some stage it will be necessary to stand in front of those people and say - you were right about the diagnosis, here are the sorts of things we'll have to do if America is going to get back on its feet - and that's a transition, I certainly would agree with you, is yet to happen, but I hope and believe it will."

US unemployed people at a jobs fair
Official figures show 15 million Americans are unemployed

This is a roundabout way of saying someone in a position of trust has to confront the Tea Party with the realities of what you can do in office and wean them off the rhetoric of civil war.

Many people think Mr Daniels is the man to make it happen.

He takes an audible breath as I put the proposition to him of a run for the White House in 2012:

"It's nothing I've ever thought about and I'm not being coy about that. First of all I've got this pesky day job that I'm interested in…

"I've tried to be constructive, offer here and there some thoughts both as how we might do better as a country, and how the party whose uniform I wear might play a more constructive role, maybe a leadership role in that - I honestly would prefer to be part of defining the what as opposed to the who, but I agree to keep an open mind."

I put it to him that in 2012 the Tea Party movement could come to any potential Republican president and say "We need you to do this and that before we back you."

He smiles and throws his hands wide open:

"Then I wouldn't be their man! Ultimately if a party wants to be a party of government then sooner or later we have to accept the responsibility to be constructive and affirmative and advance to Americans a programme for a better future - and I know we can do that.

"And secondly to agree among ourselves what the priorities should be - and agree to disagree on things that are less important."

Presidential role?

Mr Daniels has been accused of lacking the charisma to run for the White House.

The Harley-Davidson riding 60-year old has balding sandy hair and stands five feet seven inches tall.

He has none of the brashness of the Tea Party demagogues, and exudes a mid-Western homeliness and relaxation that is highly reminiscent of George W Bush on the election trail.

But Mr Daniels bears the mark of a politician who has moved on from the Bush era. He is calling for an economic break with the past which is in many ways just as radical as the ultra-right, tempered with pragmatism on the social and diplomatic issues, and sees in the Tea Party movement not a threat but an opportunity.

"We're going to have to ask ourselves what kind of a country do we want to be - are we prepared to be autonomous individuals with the risks that go with that, do we have what it takes to defer gratification, not to deposit on the future and our progeny really unfair and unbearable burdens?

"I happen to think that this little uprising that some people are so worried about is the first sign that that spirit is still alive."

Watch Paul Mason's films on Newsnight on Tuesday 12 and Wednesday 13 October 2010 at 2230 BST on BBC Two, then afterwards on the BBC iPlayer and Newsnight website.

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