MADDOW: You know, if you‘ve ever taken economics, it‘s usually on day two of like a 101 level college econ class where they teach you that a spending freeze is not the way to bring the economy out of a downturn, let alone a recession. One lesson from the interminable Japanese recession in the 1990s so that-was that the government was not aggressive in spending enough for long enough and that‘s why it became Japan‘s lost decade, instead of Japan‘s lost couple of years.

And then, of course, there was the great American mistake of 1937, when as the U.S. was finally coming out of the depression, in a burst of stupid Hooverism, the government stopped spending for recovery too soon and it put the economy right back in the brink.

Deficit spending is what governments do to get economies moving again. A spending freeze is like trying to put out a fire by pouring gasoline on it. And yet, that is exactly what the president is apparently going to propose doing this Wednesday.

Joining us now is Jared Bernstein. He‘s the Vice President Biden‘s chief economist and economic policy adviser, who was not booked on this show to talk about this this evening, but then, this late breaking news happened and I ruined your night.

(LAUGHTER)

JARED BERNSTEIN, V.P. BIDEN‘S ECON POLICY ADVISOR: I‘m happy to talk about whatever you like.

MADDOW: All right. Mr. Bernstein, I appreciate it. I know this was a-this was a sort of a bait-and-switch here on you. But we didn‘t mean it.

BERNSTEIN: It is and it isn‘t. But go ahead. I‘m going to point out how some of our announcements today contradict some of your concerns about the spending freeze. But go ahead.

MADDOW: Well, let‘s go right at it. I mean, why call for a spending freeze in the middle of an economic downturn? That seems-it seems counterintuitive to say the least.

BERNSTEIN: Well, first of all, not in the middle, because we‘re talking about a freeze that would take effect in 2011.

But I think the important thing, Rachel, that your comments didn‘t get to is that we‘re not talking about an across-the-board freeze. That entitles this president to comb through the budget and find policies that help to create jobs and boost the middle class-like the policies we announced today which is what I was going to talk about anyway here-and to cut back on spending on the wasteful stuff, stuff that accumulates over the years that Congress has a very hard time pulling back on, that the lobbyists love. So, we‘re talking about boosting the spending that helps the middle-class pushing back on the special interests.

So, for example, today, we talked about a set of programs that will be in the State of the Union, that will be in this budget, the very budget we‘re talking about-programs that nearly double the child care tax credit for middle class families, cutting much higher into the middle class than the current policy, retirement security policies, policies that help students facing burdensome debt from college loans, policies that help with elder care. All of those are policies that can be boosted while this freeze is pulling back on some of the wasteful stuff that is nothing to do with jobs in the middle class.

MADDOW: To be clear, though. I mean, what we‘re hearing tonight from Washington is that this proposed spending freeze would be everything other than defense, Veterans Affairs, Homeland Security, or State Department spending and also, entitlements. You‘re saying that‘s not accurate. You‘re saying there‘s whole other swaths of the budget that the president is not dedicated to freezing.

BERNSTEIN: What I‘m saying is that, that is an aggregate freeze but it‘s not an across-the-board freeze.

Let me explain what I mean. If you have an across-the-board freeze, you say, OK, folks. Every agency, everything goes down by 3 percent, end of story. It‘s real simple.

That‘s not what this is. Some things will go down. Some things will go up. More things will go down than will go up. That‘s how you achieve some of the deficit savings.

But, the fact is that we can get in there and target those parts of the budget for expansion just like the ones I mentioned.

Now, on the other-there‘s also a bunch of emergency spending that‘s outside of this freeze. The Recovery Act will continue to create employment. By the way, that‘s one of the other things I wanted to talk to you about because I know you get this.

The Recovery Act saved or created 2 million jobs so far, on track to create or save another 1.5 million before it‘s done. That‘s going to be in effect, of course, the rest of this year and in 2011 as well. This freeze won‘t affect that at all.

New jobs initiatives that the president will be outlining in the State of the Union-those will also be accommodated under this program.

So, we‘re going to really shift our focus here to stuff that works and

to help stabilize what is truly a long-term, unsustainable budget picture,

by squeezing stuff that doesn‘t help.

MADDOW: So, cutting $250 billion out of the budget and at this point, you‘re saying, don‘t worry, it‘ll be all good cuts and the only stuff that will be left and increased is the stuff that creates jobs, it‘s hard to imagine that there‘s going to be a big enough impact on the deficit here to outweigh the overall effect of cutting government spending at a time when government spending is one of the true successes in why we‘re turning around out of this recession. I mean, you can brag on the stimulus.

BERNSTEIN: Right.

MADDOW: . and talk about how more of it is still due to go into effect.

BERNSTEIN: Right.

MADDOW: It seems like responsible economists right now and many of those who are polled by "USA Today" are saying, we need a second stimulus. You guys.

BERNSTEIN: Right.

MADDOW: . are not-not only not talking about a second stimulus, you‘re talking about trying to cut $250 billion out of the budget.

BERNSTEIN: Well, first of all.

MADDOW: I have to tell you, it sounds completely, completely insane.

BERNSTEIN: Two hundred and fifty billion over 10 years, but-by the way, I think it‘s wrong that we‘re not talking about additional programs to foster job growth.

The president, last month, talked about new jobs initiatives in areas of clean energy investment, building on some of the successes of the Recovery Act that you mentioned, but also considerable deep investments in clean energy, manufacturing for example, here in the United States, building the components of the new clean energy economy, education spending. The president talked about some favorable tax policies for small businesses. That‘s very much part of this targeted jobs agenda that you‘ll hear more about on Wednesday night and infrastructure spending-and, by the way, to that the president attached a number $50 billion.

So, we‘re talking about some serious investments in job growth to boost the middle class and I would again remind you about a set of announcements the president and vice president made today in the area of child care, elder care, student lending, retirement security, all part of new initiatives or expanded initiatives that you‘ll hear going forward-totally consistent with the freeze we‘re talking about.

MADDOW: And all of which are very on-message and all of which will make a big difference to the working families that will benefit from those directly? They are relatively small, relatively targeted programs. By saying that there‘s going to be a discretionary freeze in discretionary spending going into effect in three years and that we have to find all the spending that we need as a government within these parameters, where, you know, in real terms with inflation, overall spending is going to shrink.

BERNSTEIN: Let.

MADDOW: If responsible economists say, you know, what we need is a second stimulus-that-this pronouncement tonight has made that impossible. If there needs to be some other major job creation effort, not the minor targeted problems that you‘re talking about there‘s no room for that.

BERNSTEIN: No, I disagree in the following sense. Let me tell you-and I work with Christie Romer and the president and vice president get this, there‘s going to be no stupid Hooverism around here to use your, I think, very apt term.

Spending programs in order to generate the kind of job growth that we need to offset this-the impact of what was the deepest recession since the Great Depression generally will fall outside of this freeze. All of the programs I mentioned.

And these are-yes, you can-you can say that some of the programs I mentioned regarding the middle class are relatively smaller than, say, a $787 billion stimulus package. But when you start talking about $50 billion for infrastructure, when you start talking about resources for small business lending, when you start talking about a significant investments in clean energy you‘re talking about real money and real jobs.

And this president is just not going to give up on the urgency of delivering that for the American people, while at the same time squeezing down on spending that does nothing to boost the middle class, or create jobs that nobody has been able to do anything about, and that‘s making this budget unsustainable.

So, I say, stay tuned, Rachel.

MADDOW: I hear you and I hear your optimism here but you are trying to sell the virtues of government spending to rebuild the economy on a day that the White House has just announced a spending freeze. And while there may be spending out there that is not good for the country, that isn‘t creating jobs, that isn‘t doing what we need for the economy, there‘s no reason why those things couldn‘t just be cut without an overall pledge to reduce the total amount of government spending, which-I maintain-still sounds like stupid Hooverism.

BERNSTEIN: If everybody that we negotiated on these kinds of issues with gets this the way you did, you probably would be right. But, in fact, when you get into the budget-and I thought it would be easier than it was, maybe I was a little naive-there is a lobby behind every single dollar in the federal budget. If you don‘t believe that, come ands sit in on a budget meeting.

There-it is so difficult to surgically get rid of the wasteful stuff. You need a program just like this, where the president is going to have to get the buy-in from the Congress on this, to comb through the budget and to finally do something about those programs that aren‘t addressing our key priorities: middle class families, job growth, wages, and incomes for the broad, working middle class. That‘s what we‘ve got to be about.

And, Rachel, if you find us cutting programs that boost those kinds of opportunities, bring me in here and we‘ll talk about.

MADDOW: Well, the pledge to defense, veterans, homeland security, and state and entitlements, target everything else for a freeze is going to make those fights a lot harder, not easier, in terms of making them on their substance, because you‘ve just made the competition that much tougher. I would say Mr. Bernstein, I mean, you are thought of as one of the-one of the progressives, one of the people progressives take heart is in the administration. A lot of people are very happy on the left when Vice President Biden asked you to be his chief economist and economic policy adviser.

BERNSTEIN: Well.

MADDOW: The White House was on the verge of really winning a lot of liberals over with taking on this fight with the banks and taking on Wall Street reform and taking on some of these other economic issues, really picking a fight with Republicans on this. And then to have followed that up the next day, the next business day, by following Evan Bayh‘s idea to adopt John McCain‘s economic, main economic campaign promise.

BERNSTEIN: Yes. Now, John.

MADDOW: . for 2008 which he lost.

BERNSTEIN: Yes. But I.

MADDOW: . seems to me, politically, doesn‘t-politically, doesn‘t make any sense.

BERNSTEIN: Well, folks will correct me if I‘m wrong, but my recollection is that McCain‘s was an across-the-board freeze.

Remember, ours is not an across-the-board freeze. Ours is a freeze that enables us with the Congress to go through-this president-to go through the budget and-believe me, his economic team is going to be sitting right there with him and try to accomplish the goals that I mentioned.

And, by the way, you talked about progressives and our role within the administration-I just want to bring you back to this event today with the vice president, the president, the middle class task force. For the last year, our task force has had 11 meetings across this country where the vice president has heard from families about the budget difficulties that they face, paying for college, paying for child care, paying for elder care, saving for retirement.

And today-and let‘s not let-let‘s not forget this, Rachel, because I especially would like someone like you to help appreciate and amplify this point-let‘s not forget that today this president stepped in and did something that presidents haven‘t done for decades, that this middle class squeeze has been forming, and he did something about it.

He helped to ease that squeeze with an extension of that child care tax credit that went from capping out at $40,000 to up to $80,000, so that the max credit would now go to families much higher up in the income scale. For elder care, help to offset some of those costs; for kids paying burdensome debts on their student loans.

That‘s the kind of targeted squeeze-anti-squeeze programs that we will, you‘ll hear about in this budget and are completely consistent with the message of jobs and middle class families.

MADDOW: Do you know that-does the administration know, I guess, is there an awareness that no matter how conservative you tack on some of the larger economic issues, doing these as you say, targeted squeeze-trying to squeeze-proof the middle class.

BERNSTEIN: Right.

MADDOW: . in terms of the economic downturn with those targeted things, but meanwhile, taking what-I hope you will concede-is a big right turn with this pledge for an across-the-board, or almost across-the-board spending freeze.

BERNSTEIN: Yes.

MADDOW: You guys know that you‘re not going to get any Republican support, right?

BERNSTEIN: Rachel.

MADDOW: I mean, this isn‘t-is this an effort to try to win Republican votes for the president‘s economic agenda? Because they‘re not coming.

BERNSTEIN: Look, cutting wasteful spending is not a big right turn.

I mean, it‘s neither right nor left.

(CROSSTALK)

BERNSTEIN: It‘s good budgeting.

MADDOW: Cutting wasteful spending is something the president had pledge to do before this today. This is new. This is a spending freeze in the midst of an economic downturn.

And maybe we‘ll be out of the economic downturn by then, but pledging it now either sets you up to break that if we‘re still in the economic downturn or sets you up to really put the country further into the brink than it already is in order to look conservative.

BERNSTEIN: It is important to remember that the freeze doesn‘t take hold until 2011, but that said, the fact that this is not an across-the-board freeze means that forget left and right. There are lobbyists supporting special interests throughout this budget that we can finally get in there and do something about. And I just don‘t see why that‘s serving the American people poorly if, and only if, at the same time we‘re doing everything we can to deliver on jobs for the middle class. And if we can do both of those, I would think that that would be exactly where we want to be.

MADDOW: Jared Bernstein is the chief economist and economic policy adviser for Vice President Joe Biden-you are a good sport to go toe-to-toe with me on this. You haven‘t convinced me at all. I think you‘ve got a huge policy and political problem on your hands because of this. But if all goes well for you, I think you‘ll be here more trying to defend it.

And I appreciate your time tonight, sir. Thank you.

BERNSTEIN: You‘re welcome, Rachel.

MADDOW: OK.