CHRIS MATTHEWS: We start, however, with Peter Orszag, who‘s director-was the director of the Office of Management and Budget. Sir, you‘ve got a big job, so I‘m going to ask you a big question. The American people are hurting right now. You‘re in charge of the budget. How do you use the budget to get the unemployment rate down from 10 percent while we‘re all still alive?

PETER ORSZAG, DIR., OFFICE OF MANAGEMENT & BUDGET: Well, two things. First, we need some additional job creation measures now. For example, the president put forward a new jobs and wages tax credit, which will help spur hiring and wage increases among small businesses. And then we need to get the deficit down over time to make sure that job creation can continue and private sector activity can expand.

MATTHEWS: I‘ve always wondered, since this administration took office, why you don‘t use the oldtime religion. Why don‘t you do what they used to do, get all the public works projects which are backed up, have all been approved but haven‘t been funded, go to every state that wants a bridge that‘s below code, everywhere that‘s below code-and there are a lot of them out there-and say, Go build them, go fix them? Why don‘t you start with Monahan (ph) Station in New York? Why don‘t you build that? Why don‘t you start building rapid rail from our big cities so we can catch up to the Europeans?

ORSZAG: Well...

MATTHEWS: Why don‘t we do big stuff in the federal government anymore, like Eisenhower did, like Lincoln did?

ORSZAG: That‘s exactly what we are doing in the Recovery Act. There are billions and billions of dollars in transportation investments that will be-that are building bridges and roads. And with regard to high-speed rail, the Recovery Act included more than $7 billion in investments in high-speed rail in this budget, continues that by providing another billion.

MATTHEWS: Well, where are they? OK, we‘re in Washington, D.C. Point one out to me. Where can I go tonight and see rapid transit? Where can I see bridges being built, roads being-I don‘t see them.

ORSZAG: The Department of Transportation-in fact, the president was down in Florida last week, making an announcement about some new plans. This does take time to build the high-speed rail of the future, but it‘s a good investment to make.

MATTHEWS: Yes, I‘m still not hearing it yet, sir. I think we need more volume and more activity and not just a pilot project to connect Tampa to Disneyland.

ORSZAG: They‘re not-no, no. These are-they‘re not pilot projects.

MATTHEWS: Really?

ORSZAG: These are billions of dollars of investments in the future of our rail system.

MATTHEWS: OK, let me ask you about...

ORSZAG: It‘s exactly what you‘re calling for.

MATTHEWS: ... this freeze we‘ve got. I know. I want more, OK?

ORSZAG: OK.

MATTHEWS: You‘re not going to make me happy, but that‘s not your job anyway. You can try.

ORSZAG: OK.

MATTHEWS: Let me ask you about this problem with the freeze. It seems to me, if you look at the new budget, it‘s got $3.8 billion in outlays. If you look at what‘s left in the budget, after you take out the security issues-defense, veterans, energy, Homeland Security-after you take out the entitlements, Social Security, Medicare, Medicaid, if you take out interest payments, all that‘s mandatory-you‘re left with about 10 percent of the budget that you can freeze, am I right?

ORSZAG: A little north of that. It‘s 14 percent. But OK, let‘s-continue. Yes.

MATTHEWS: OK. So how can...

ORSZAG: It‘s not the majority...

MATTHEWS: ... really restrict federal spending if you‘re only restricting 14 percent of it, its growth? How much are you really holding down on federal spending?

ORSZAG: Well...

MATTHEWS: If I said, I‘m only going to take one seventh of my income and start spending less than that, people would say, That‘s not really...

ORSZAG: That‘s not all we‘re doing.

MATTHEWS: OK. Tell me what you‘re doing.

ORSZAG: No, no. That‘s not all we‘re doing, so...

MATTHEWS: OK.

ORSZAG: The freeze on non-security discretionary spending will save $250 billion over 10 years. That‘s only part of the $1.2 trillion in deficit reduction that is part of this budget. So look, we never said it was the end-all, be-all. It is an important step, but it‘s not the only step.

MATTHEWS: So you‘re going to save about what, $25 billion a year?

ORSZAG: From that step, yes, an average of $25 billion a year.

MATTHEWS: So you‘re going to save $25 billion a year on a $3.8 trillion budget.

ORSZAG: But that, again, is only part of the deficit reduction that we‘ve put forward. We‘ve put forward more than a trillion dollars in deficit reduction over the next decade.

MATTHEWS: OK. Let me ask you about how you make calculations because you‘ve got a very tough job. I mean, I used to work at OMB. I used to work on the Budget Committee. I know how hard it is.

ORSZAG: You used to work at OMB?

MATTHEWS: Yes, I was on the Government Reorganization Project...

ORSZAG: OK.

MATTHEWS: ... in ‘77 to ‘78, ‘79. Let me ask you this...

ORSZAG: Who knew?

MATTHEWS: And I got to be a speech writer, which was a better job.

ORSZAG: OK.

MATTHEWS: Let me ask you about this question. How do you deal with the threat-the Chinese have a lot of our paper. We‘re borrowing a lot from abroad. What‘s the tipping point where we‘ve just run too big a deficit for too long? We‘ve got about 1.6 looking at us now, it was 1.2. How do we know we‘re at the point where nobody‘s going to buy our paper, we‘re going into debt, but we‘re going so far into debt that people aren‘t buying our debt anymore? And that‘s when our dollar shrinks. When do we reach the point of no return, or well, diminishing returns in terms of budget and deficit?

ORSZAG: Well, we need to get ahead of that problem. Right now, what‘s happened is private sector borrowing has collapsed. And that‘s a big reason why, despite these deficits, the 10-year Treasury is yielding less than 4 percent. It‘s because Treasury securities remain the safest in the world and investors are seeking that safety and security...

MATTHEWS: I see.

ORSZAG: ... while other private borrowing has collapsed. As borrowing picks up in the rest of the economy, there will be upward pressure on Treasury securities, and we need to get ahead of that.

MATTHEWS: OK. Well, I hope we don‘t reach that point. I ask you about it only...

ORSZAG: I agree.

MATTHEWS: ... of fear that we don‘t want to be where we can‘t borrow anymore. Thank you, Peter Orszag. You‘ve got a tough job, OMB director at the White House.

Well, now we‘re going to have some fun here. Republican congressman Jeb Hensarling of Texas told President Obama at Friday‘s House Republican retreat-it turned out not to be a retreat-that the old annual deficits under Republicans have become the monthly deficits under Democrats, an assertion that the president shot down.

Do you still argue, sir, that the monthly deficits of Barack Obama are equal to the Republican annual deficits?

REP. JEB HENSARLING (R-TX), BUDGET COMMITTEE: Well, that‘s not what I said. I said Democratic deficits. Chris, you know, you‘ve been in Washington. only Congress-only Congress...

MATTHEWS: Right.

HENSARLING: ... can pass spending bills. I‘ve got a chart that shows it right here. If you take the 12 years that Republicans were in control of Congress, you had budget deficits of roughly $104 billion a year. Now, listen, I‘m embarrassed about that. But in the three years that Democrats have been in charge of Congress, what you have is actually budget deficits that are approaching $1.1 trillion. So yes, I stand by the assertion.

MATTHEWS: Well let me explain this...

HENSARLING: Maybe the president misunderstood me. Otherwise, he has his facts wrong.

MATTHEWS: Well, let me go this way. If you look at the deficit as it‘s grown over time-as you know, it‘s grown over time-by the time this president took office, the FY, I guess, 2010 budget was already up to $1.2 trillion. He‘s now causing-he‘s now calling for a budget deficit of $1.6 trillion. So he‘s basically taking it from $100 billion a month to $133 billion a month. That‘s about a third increase per month. That‘s really what the increase has been under his watch, right?

(CROSSTALK)

MATTHEWS: No, let‘s just talk about this president because that‘s the guy you were debating.

HENSARLING: Well, again, Chris, all the president can-no, no, no, no, no.

MATTHEWS: Huh?

HENSARLING: No. No.

MATTHEWS: But isn‘t that factually correct?

HENSARLING: Read the transcript, please, of what I-what I said.

MATTHEWS: No, I‘m-look, I‘m not arguing...

HENSARLING: You‘re switching my words. The Congress is the one...

MATTHEWS: OK...

(CROSSTALK)

MATTHEWS: Let me ask you a fresh question...

HENSARLING: ... the president inherited a deficit, but he inherited it from the Democratic Congress.

MATTHEWS: Oh, OK.

HENSARLING: He inherited it from the Democrat Congress.

MATTHEWS: So...

HENSARLING: He came in-look at what happened at FY ‘09. Look at what he does over 10 years, what he proposes over 10 years. And although he wouldn‘t answer my question, or he declined to answer it on Friday, once again, we see his budget will triple the national debt over the next 10 years. And frankly, it‘s just unacceptable.

MATTHEWS: But you know, it is true we inherited a $1.2 trillion deficit that‘s gone up to $1.6 trillion. That‘s really what he‘s inherited, right?

HENSARLING: Well, again, if he inherited it, he inherited it from the Democratic Congress. The point is, are you going to make the situation worse or are you going to make it better?

MATTHEWS: OK, let‘s talk...

HENSARLING: It still triples the national debt. In his proposed budget over 10 years, he increases the size of government from roughly 20 percent of the economy in his budget window...

MATTHEWS: OK...

HENSARLING: ... to 25 percent of the economy. That‘s the question I asked on Friday, and he declined to answer it. But today, with the release of his budget, he does obviously answer the question, and the answer is yes. You can‘t say, I‘m going to be fiscally responsible, and do these kind of things. I mean, you can‘t have it both ways.

MATTHEWS: This blame game-under President Bush, I don‘t think the president was known for vetoing spending bills, was he, President Bush.

HENSARLING: No, he wasn‘t. And frankly, it‘s one of the reasons that

Republicans were let out of office. But again, when it comes to spending -

listen, there‘s-there‘s blame on my side of the aisle. I fought my own party leadership on these spending items. You can look at the record. I‘ve introduced budget legislation to ensure that the cost of government, the federal budget, doesn‘t grow faster than the family budget. I‘ve actually written budgets in Congress.

But again, what was annual budget deficits under Republicans have become monthly budget deficits under Democrats.

MATTHEWS: OK.

HENSARLING: When it comes to...

MATTHEWS: Let‘s-let‘s...

HENSARLING: ... spending and deficits, Republicans are rank amateurs compared to Democrats.

MATTHEWS: OK, let‘s talk about what you would do. We have a budget

of about $3.8 billion (SIC) in outlays that‘s been proposed by the

president today. Once you take out Medicare, Medicaid, Social Security,

interest payments, all the security issues, you‘re left with about 14

percent of the budget you can actually cut. If you get rid of basically-

we‘re looking at a pie chart here. You‘re familiar with it. Once you get

rid of all that non-security discretionary spending, get rid of all of it -

you‘d have to get rid of all of it to balance the budget, wouldn‘t you.

HENSARLING: Well, Chris, what you‘re going to ultimately have to do is reform entitlement spending for future generations. People who are retired, or soon to be on retirement, I mean, they need the same deal that they‘ve counted on their whole life. But otherwise, you know, somebody‘s going to have to shoot straight with the American people. And ultimately, what Republicans will be proposing is, you know, to some extent we want to make sure you have the same retirement plan and the same health care plan that your member of Congress has. As you well know, that‘s the federal Employee Health Benefit plan. It‘s the thrift savings plan. It‘s essentially a defined contribution.

It‘s the only thing to keep us from bankrupting this economy and being the first generation in America‘s history to leave the next generation with a lower standard of living. As we all know, ultimately, you have to reform entitlement spending, but the president steps backwards.

MATTHEWS: OK...

HENSARLING: He adds new entitlement programs, new entitlement spending. He takes a bad situation, he makes it worse. And that‘s one of the reasons we continue to have sluggish job growth...

MATTHEWS: OK...

HENSARLING: ... in this economy because people are wondering, How are we going to pay for all this debt?

MATTHEWS: OK. Are you speaking for Eric Cantor and John Boehner and the Republican leadership? Are you speaking for them when you say you want to restrict the growth of Social Security benefits?

HENSARLING: What I said was, everybody who‘s presently on-and I speak for nobody but Jeb Hensarling. What I said was, for people who are presently on Social Security and Medicare, they have to have it, those who are close to it, 55 and above.

But those under 55, we have to start a transition to a new system that will save America from bankruptcy and a lower standard of living. I‘m happy to say that. I believe they have said it. And you know, I would hope that the president would want to lead on this.

MATTHEWS: OK, but...

HENSARLING: But instead, he says, Well, what I‘m going to do is freeze the budget. But he doesn‘t do it.

MATTHEWS: So what it all comes down to, sir, is after all this arguing and back and forth last Friday up in Baltimore, the difference between the Republicans and the Democrats-between you, sir, and the Democrats-is that you‘re willing to say on national television, as you are right now, you are willing to restrict growth in future Social Security benefits. You‘re willing to say, for people who make less than 55 -- or less than 55 years old, you would give them lower Social Security benefits than now projected. You would cut them. You‘re one to say that, and they‘re not. That‘s the difference between you and them.

HENSARLING: Well, I would say that-I‘m willing to say that that part of the social contract is going to have to be reengineered. Listen, people under 55...

MATTHEWS: You use clever...

HENSARLING: ... know that the present system...

MATTHEWS: You‘re using-oh, here we go with...

HENSARLING: ... is going bankrupt.

MATTHEWS: ... Latinate words!

HENSARLING: You know...

MATTHEWS: The Latinate words. This is why people don‘t trust politicians, including you, sir. "Reengineer, reform"-you mean cut Social Security benefits as a way of balancing the budget. That‘s what you just said three times. Do you want to say it a fourth time?

HENSARLING: I think-no, no, no, no, no, no, no, no, no...

MATTHEWS: Reengineer, reform-what‘s your next Latinate word going to be?

HENSARLING: No, what I‘m saying is, if you would look-if you would look-ultimately, ultimately, ultimately, I believe you can get better health care and better retirement security if you go to a defined contribution plan. We had this debate in Social Security a few years ago. Now, ultimately, we weren‘t victorious. There will be a transition. If you want to say that those under 55, as a transition, are they going to get the same deal as their parents? No, probably not. But the question is...

MATTHEWS: OK. Probably not. So you‘re probably...

HENSARLING: ... sure, we can get that generation...

MATTHEWS: ... going to cut the Social Security benefits...

HENSARLING: ... (INAUDIBLE) parents, but ultimately...

MATTHEWS: ... future benefits...

HENSARLING: But ultimately...

MATTHEWS: ... and you‘re going to privatize the plan.

HENSARLING: ... what will happen then is that your children-your children won‘t be able to go to college. Your children won‘t be able to have the same opportunities that you had.

MATTHEWS: OK...

HENSARLING: Now, what the big difference is here is, Chris, is that the Democrats are proposing to triple the national debt over the next 10 years. You cannot bail out, borrow and spend your way into economic prosperity. That‘s why we continue to be mired in 10 percent unemployment in this economy.

MATTHEWS: OK. Thank you.

HENSARLING: And the Republicans propose an actual freeze on non-defense discretionary and to keep spending at its historic levels. I mean, there was a time that Steny Hoyer, the Republican-rather, the Democrat majority leader...

MATTHEWS: OK...

HENSARLING: ... when deficits were $160 billion, said, This is fiscal child abuse.

MATTHEWS: OK...

HENSARLING: And now they‘re $1.6 trillion and they‘re singing "Che Sera Sera."

MATTHEWS: OK, well, sir, you‘ve got a lot of guts to come on and talk about cutting future Social Security benefits.

HENSARLING: So that‘s the difference!

MATTHEWS: And that‘s what you‘ve done. That separates you from your leaders because I‘ll bet you by tomorrow morning, you‘re going to hear from Eric Cantor and you‘re going to hear from John Boehner, Are you crazy for calling for cuts in Social Security benefits?

Anyway, thank you for doing so because it shows your point of view on how to balance the budget. But that‘s tough stuff and people aren‘t going to like hearing it. Anyway, thank you, Jeb Hensarling...

HENSARLING: No, what I said...

MATTHEWS: ... a true Phil Gramm. Coming up...

HENSARLING: ... is number one, you can‘t do it without reforming...

MATTHEWS: OK...

HENSARLING: ... entitlement spending.

MATTHEWS: OK. OK.