hi, everybody. welcome to "the wall street journal report." i'm maria bartiromo. the president's budget, the recovering economy. is inflation ahead? i'll talk to former chief economic adviser martin feldstein about tough choices. and my interview with former defense secretary donald rumsfeld. $700 billion spent on the war in iraq. over 4,000 american casualties. was it worth the cost? plus, if you're getting ready to scratch that travel itch, how you can weatherproof your vacation. protecting yourselfrom mother nature and the airline industry. "the wall street journal report" begins right now. >> this is america's number one financial news program, "the wall street journal report." now maria bartiromo.

>> here is a look at what is making news as we head into a new week on wall street. the first shots have been fired in the battle of the 2012 budget. president obama releasing what he calls his cut and invest agenda, which projects an annual deficit of more than $1.6 trillion for the fiscal year. the president's proposal would freeze discretionary spending, reduce pentagon spending and increase education, infrastructure, and clean energy allotments. it does not address the fast growing and expensive programs of medicare, medicaid, and social security. the marks took a breather early in the week, but the rally kept on rolling midweek. by wednesday, the s&p 500 doubled its lows of march 2009, and the markets hit two and a half year highs. convicted swindler bernard madoff has granted his first jailhouse interview. madoff telling the "new york times" he never thought the collapse of his ponzi scheme would cause the sort of destruction it did to his family, and he also said that

various banks and hedge funds, quote, had to know about his fraud. and their attitude was iyou're doing something wrong, we don't want to know about it. the federal reserve says the economy is taking up steam in minutes from the fed's last meeting. officials were slightly more optimistic than in the past, but said they would not change their plans to continue buying $600 billion in bonds. and china now has the world's second largest economy, surpassing japan in total size of the gross domestic product. the united states stills that world's largest economy. martin feldstein has advised presidents from reagan to obama, and currently teaches at harvard. he is one of the smartest guys in the room. he joins us now to talk economics. marty, great to see you again. thanks for being with us. >> nice to be with you, maria. >> this week president obama presented his budget for fiscal year 2012. he says he is making deep in discretionary spending. some say the cuts don't go far enough, and neither side touches

entitlement programs which is the fastest growing part othe budget like social security and medicare. what are your thoughts on budget 2012? >> well, he really didn't do very much at all. the budget reductions that he talks about over the next ten years amount to a trillion dollars if they actually all gotten acted. and that still leaves cumulative deficits o$7 trillion. so he took the cumulative deficits down from $8 trillion to $7 trillion. no real serious progress there. i think, though, that this is a negotiating budget. i think there are a lot of contradictions in. they're saying one thing and putting down different numbers. so i think they're hoping for some closed door negotiations, and that gives me some optimism that we'll actually see more than that. >> marty, you wrote an op-ed in "the wall street journal" calling for the u.s. to lower corporate tax rates. talk to us about that. how do you justify that with the

huge deficit that we face? >> remember, i was not talking about a net loss of revenue. i think that we can lower corporate tax rates. we can change the tax treatment of the profits in american firms earn abroad, and a fair amount of that can be recouped by a combination of the inflow of capital that will occur, the better use ocapital that will occur in the u.s. in other words, through growth, through growth of gdp and growth of profits, growth oreal wages. but the fact that real wages are going up means that the benefits of this tax change would extend beyond corporations. they'd extend to everybody whose wages are going to be improved by the greater availability and better use of capital in the u.s. so i would say that some othe proposed changes and tax rules for individuals should also be used to help reduce the corporate sector. and yet as a result of all of

that, we could have everybody better off. >> how are things going now? i mean obviously unemployment has persisted. corporations need some encouragement to hire new people, put new heads to the payroll. how would you characterize things right now? and why has the housing market been so stubborn? it is just not participating in any recovery. >> absolutely. well, the fourth quarter was really very good. we have very strong growth in the fourth quarter, and even more unusual relative to where we've been since this recovery began 18 months ago, we had a big increase in final sales, which was basically consumer spending. if you look at the gdp growth in the fourth quarter, essentially 100% of that could be accounted for by the increase in consumer spending. and half of that was consumer durables. but that is not following through as we come into december, january, and february. so some of the great momentum that we had at the end othe year i think is being lost.

and housing remains, as you said, housing remains just terrible. we've got this big overhang of homes with mortgages that exceed the value of the house. defaults and foreclosures are at an all-time high. and so house prices continue to fall. and house prices have fallen i think 3.5% in the last five months alone. so something needs to be done. and you and i have talked about how that could be fixed. but right now we're not seeing any action from the administration on that front. >> right. and a lot of people think that until we see some action, prices will continue to good lower, home prices. what about the other side of the county, marty? are you concerned about inflation in the united states? we're seeing, certainly, rising prices across commodities, food. you've got commodities like oil, copper, all higher. and we're seeing food inflation overseas. do you think that touches our

economy? and do you think that the fed is nimble enough to deal with this? >> well, in the short run, there is very little going on that affects us. we're still looking at inflation rates of under 2%. we're looking at unit labor costs, which is really the key driver, the key link between prices and wages. unit labor costs actually fell over the last 12 months. so there really isn't a short run inflation problem. the problem will come as the economy begins to tighten as labor and product markets begin to tighten. whether the fed at this point will go back to its exit strategy plans and actually do something to prevent higher inflation. >> so that sounds like that's a long way off? >> it is certainly not this year or next year. but it could be a year or so after that, and the bond markets are aware of that now. and so iyou look at longer

term interest rates, ten-year rates, the ten-year rate is substantially higher than the five-year rate. and that's much higher than very short-term rates. and what that is saying is, and you see this if you compare the interest rates on treasury bonds with those on tips, the implicit inflation is definitely heading up. people are expecting that we're going to see significantly more inflation, say, from five years out to ten years than they're expecting over the next five years. >> what is your take on the news of the week, marty, the new york stock exchange and the german deutsche borse announcing a definitive agreement where the german company would become the majority holder of the new york stock exchange? is this more than symbolic? what does it tell you? >> it really i don't think is going to change the way business is done in new york or in the new york stock exchange. so there will be a different parent holding company, but i don't think it really says anything about the way in which

our markets are going to operate. >> all right. we'll leave it there. marty, always nice to have you on the program. thank you so much. >> good to be with you. >> we'll see you soon. martin feldstein joining us. up next, donald rumsfeld back in the public eye with a new memoir that looks back on his long career and his regrets. >> i decide id should resign, and i did. i attempted to resign twice. and later, has our recent winter weather d your travel plans? how to protect yourseland your vacation when mother nature has other ideas. ss carrier. you may have heard them already. the doubt-casting. the empty comparisons. while they shout them at the top of their lungs... to try to blur the lines. in the end, just ask yourself, does the network work ? this is america's largest and most reliable network. verizon. built so you can rule the air.

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but actually, it's easier than you think, because general mills big g line of cereals is america's number one source of whole grain at breakfast. there's whole grain in every box... ♪ ...from chex... to cheerios... to lucky charms. so you can get the whole grain you want with the taste y le. get started on the whole grain you're missing with your favorite big g cereals. make sure to look for the white check. few public servants in american history have been closer to dramatic moments in international relations than two-time secretary odefense donald rumsfeld. both the youngest and the oldest person to hold that position. mr. rumsfeld's new memoir is called "known and unknown." i talked to the former defense

secretary, white house chief of staff, congressman and ceo on his remarkable career and his personal regrets. >> because of the wonderful opportunities i've had for so many decades to participate in the course of our country, and important historic events, i wanted to take my time and use primary documents and try to give the reader and historians an opportunity to see how tough decisions are made and what it looks like from the inside. i also hope that people will come away from reading it with a desire to serve in the public service. >> what would you describe as your greatest success? >> when richard nixon resigned, we never had a president resign the presidency. and the man who came in to succeed him was the only man in our country's history who had never been elected president or vice president. the country was in a terribly difficult time. the vietnam war was in turmoil. the economy was in the tank.

and he was able to help restore integrity to the white house and to the government of the united states. but that was the most difficult task i ever had serving as his chief ostaff. >> so much of this nearly 800-page book covers your six years as george w. bush's secretary of defense. can you take us back to that time and some of the tough decisions that you had to make? i mean $700 billion spent on the war in iraq. over 4,000 american casualties. was it worth the cost? >> i was in congress when the first $100 billion budget, not deficit, but budget passed in the lyndon johnson presidency. you can think about that. that's amazing. here we are today with debt of a trillion plus. the short answer is it is worth it. if you think othe people in iraq and the people in afghanistan, they've been

liberated from vicious regimes, the taliban and the saddam hussein regime. they have a chance. the american people, the men and women in uniform, god bless them, each one of which is a volunteer, they each put their hand up and said send me. and they've given the people in that part of the world an opportunity, a chance to create a different kind olife for themselves. >> can you categorically say that democracy is best everywhere? a lot of people like to say oh, you know, it's not america's business, and we shouldn't be involved in some of these things that don't involve us. how do you make the case to america out there who might be skeptical? >> that's a very important question. and i think it would be wrong to think that there is a single template that ought to be pressed down on other countries, the american template. i don't think that's right. i think other countries have their own cultures, their own histories, and they're going to evolve at their own pace. but if you look down from mars on this globe, the countries where the people are doing the

best are the ones that have the freer political institutions and the freer economic institutions. we know that. we know people are suffering all across the globe in dictatorias. shot at night, the south is brilliant color. the north is black. why? the same people. the same resources north and south. the only difference is a economist dictatorship in the north. the wonderful saying there will be no peace in the world until ever man is free, because to every man he is the world. >> you offer some personal regrets in the book. >> sure. >> let me ask you about those, at abu ghraib prison in iraq. more than anything else i failed to do, i regret i did not leave at that point. >> i do. i believe in accountability. this was such a terribly disgusting deviant inexcusable behavior on the part of these

people to abuse those prisoners that were in our custody. and the photographs had a terrible impact on our country. it damaged our military. it gave the enemy an opportunity to use that to recruit people and raise money. and i decided that i should resign, and i did. i resigned -- attempted to resign twice, feeling that the country would be better ofif the world saw that there was some kind oan accountability for that. >> what do you think the impact of the uprising in places like egypt will mean? >> first of all, the war in afghanistan and iraq are the first wars othe information age. and the way people are viewing them and seeing them through 24-hour news and video cameras and e-mails and all of these electronic social networking things, it's changed enormous amounts of how things used to be. >> speeding things up?

>> very rapidly. >> what are the implications for the u.s.? >> well, the implications are that we have relationships there that are going to change significantly one way or another. the implications for the things are values, the things we believe in the world. the things we hope for people to have better lives. which will only come from freer political and freer economic systems in the world. >> my thanks to donald rumsfeld. up next on the "wall street journal report," when flight delays and winter weather have you sleeping at the airport, what you need to know to get troubled travel plans taking off. and as we take a break, take a look at how the stock market ended the week.

have severe winter storms grounded your travel plans this winter season? joining us with advice on how to minimize traveling delays, mark, it's greta to see you again. >> nice to be here. >> thank you so much for joining us. so we've seen some difficult weather this season. several major winter storms. has that impacted the airline industry? what has that done to travel? >> oh, it has in a very serious way. in fact, in the month of december, 3.7% othe flights of

u.s. airlines were canceled because of weather. and that translated -- the recent storms that we had in the midwest and the northeast in february the first week, losses -- lost profits of $120 million and $150 million. this whole winter season, the u.s. airlines could conceivably lose from cancellations, lost profits of upwards of $600 million. >> so is there a way to sort of weatherproof your vacation to minimize any issues you might face? what do you need to do? >> well, sure. from the consumer point of view, some very basic things you should do. i would say the first thing if you travel of any major investment at all, you want to buy travel insurance. buy it at the time you book your trip. it will only cost you 5 to 7% of the cost of the trip. so it's very affordable. also when booking your airfare, i would always choose a nonstop flight. any intermediate stoppious make just increase the chances that your connecting flight is going

to be held back by bad weather. and finally, always try and get an early flight during the day. because if there is a delay, they have a ripple affect. a 45-minute delay at 11:00 in the morning could be a four-hour delay by 8:00 at night. and that means that your delay at night could turn into a cancellation. >> so you mentioned insurance. let's talk more about passengers and what rights they have when flying. >> sure. >> the department o transportation limited tarmac delays to three hours last year. >> right. >> but the rule is due for updating this spring. what should we expect? >> well, there was a loophole that allowed planes leaving from small to midsized not hub airports, they didn't have to fall under that three-hour limit. the same thing with international flights. the d.o.t. is considering a new rule that would close that loophole and establish time limits for those flights from having long delays on the tarmac. other things too. they're going ideally increase the amount of compensation for

bumped passengers to up to $1300, raise that from $800. going to give you a 24-hour period to reconsider your ticket purchase. right now you can't cancel. once you buy your ticket, it's yours. >> right. >> but if the new rule pass, you'll have 24 hours to go back and cancel your ticket. so that's great for consumers. >> what are your secrets to destressing? let's say you're on a trip already and you get stuck in delays. how do you minimize the stress? >> i make sure first off that when i pack my carry-on, i always have -- i carry a sleep mask with me. i have a little toiletry kit with me. i usually bring a sweater or light jacket. if i ever get stuck for a long delay or god forbid overnight, i know that i have enough to keep me comfortable during that delay, during that time. and that gives me the peace of mind to handle the stressful situation. >> well, it's supposed to be a nice long weekend this weekend weather-wise. >> that's right. >> but you say snow is on the horizon? >> well, that's what i heard

from the weatherman. >> amazing. >> but it's only february. we're still in winter, maria. >> we certainly are. >> these tips are things we want to keep in mind for another couple of weeks. marks, thank you so much. mark orwall. up next a look at news this upcoming week that will have an impact on your money. and things going better for coca-cola. the scuffle over a sweet secret. stay [ male announcer ] montgomery and abigail higgins had a tree that bore the most rare and magical fruit, which provided for their every financial need. [ thunder rumbling ] [ thunder crashing ] and then, in one blinding blink of an eye, their tree had given its last. but with their raymond james financial advisor, they had prepared for even the unthinkable. ♪ and they danced. see what a raymond james advisor can do for you.

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for more on our show and our guests, check out the website, wsjr.cnbc.com. now a look at the stories that may move the markets and impact your money this week. monday is president's day. all u.s. markets are closed for the federal holiday. tuesday the latest index ohome prices across the country is out from s & pk schiller. january's total sales of existing homes. thursday the release othe new homes sales is out for same month. and friday we get the second estimate ogross domestic product. that's for the fourth quarter of 2010. the initial reading indicated a growth rate of better than 3%. finally today, coke is it, or is it? coca-cola goes to incredible lengths to protect its propri y proprietary formula, kept under lock and key at an atlanta bank. this american life released what is believed to be a photo othe secret recipe taken from the notebooks of coke's founder.

lime juice, vanilla, caffeine coca, leaves with a flavor of 7 x, a blend of oils and things that go better with coca-cola. the nontrademark formula has evolved since its 1880s origins and the secret is still safe. that will do it for us today. thanks for joining us. my guest next yeek columbia university kmigs jeffrey stack. keep it right here where wall street meets main street. have a great week, everybody. see you next weekend.