This partial transcript from Your World with Neil Cavuto, July 20, 2001.

NEIL CAVUTO, HOST: Welcome to Fox. It's very nice having you.

DONALD RUMSFELD, SECRETARY OF DEFENSE: Thank you very much.

CAVUTO: Let me go right to what's happening half a world away in Italy right now. We're seeing a lot of demonstrators there, a lot of protests, a lot of anger over the president and his defense initiatives here. Are you surprised how vocal, how angry these folks are?

RUMSFELD: Well, not at all. I mean, there have been demonstrations around the world from time to time and there's nothing new in that pattern. As a matter of fact, with respect to missile defense, a careful reading of the progress that's being made clearly indicates that country after countries are modifying their positions and that a good deal of support's being achieved.

CAVUTO: That being the case, there is a little bit of worry here that maybe the Europeans just like to pick on President Bush or go after him; a few weeks ago, and now again. Is there some European odds that are going on here or what?

RUMSFELD: Well, you know, it certainly has nothing to do with President Bush. Anyone who's ever met him in the European scene walks away highly complimentary about what a fine person he is and how easy he is to deal with and how pleasant it is to work with him.

I think what you're seeing really is the fact that with the end of the Cold War, the threat from the Soviet Union gone, the countries of the world always were grateful to the United States for being the thing that kept expansionism of the Soviet Union from dominating other continents, but they never really believed we had a monopoly on cultural wisdom or economic wisdom or political wisdom, and with the end of that threat, well people are a little freer to say what they think and that's understandable. We can live in a world like that.

CAVUTO: But is this a European way to just go after new presidents? You did this with Gerald Ford. You probably remember that. Don't they just seem to be rough?

RUMSFELD: You're right, it's been the pattern, president after president, and I don't see it as terribly harmful or destructive. I'm not a psychiatrist, but it seems to me that to a certain extent, if you can take a shot at the big country or the big president, some people feel that that elevates them. But, overall, the relationships are excellent, so I think — and furthermore, as you and I know, the press tends to be more interested in conflict and controversy and criticism than in praise.

CAVUTO: Good point. Let me just talk to you about what's happening with your defense initiative right now after a successful weekend test.

Now, the fear was among some who were not keen on this system, as you know, Mr. Secretary, that this is going to lead to an escalated arms race and they're worried about that. Assure them they're wrong.

RUMSFELD: Well, I don't know where the race would be. Certainly, the Russian economy is such that they're in the process of reducing weapons, just as we are in the process of reducing nuclear weapons. I think that the problem is that a lot of people still seem trapped in a Cold War mentality, where they're convinced that there still is hostility between the West and the Soviet Union, which doesn't exist, of course, and that, therefore, we need to do things to make a more stable world.

The fact of the matter is we don't worry about a strategic nuclear attack from Russia at all. We don't worry about a major tank invasion across the north German plain from Russia. Those days have passed.

CAVUTO: But are you worried that you might not have the money, sir, for this ambitious program yourself, let alone Russia, you know, your own budgetary constraints here at home are preventing you from seeing this through to fruition?

RUMSFELD: Well, I think the important thing on national missile defense is to recognize that it takes about 1.5 percent of the defense budget. It's not like it's a dominant part. All of missile defense, including theater missile defense, only takes about 2.5 percent of the defense budget.

We had 28 Americans killed in Dhahran 10 years ago, and 99 wounded by a ballistic missile. These things are very dangerous, and the weapons that they put atop ballistic missiles today are increasingly powerful and weapons of mass destruction.

So I think that it would be very shortsighted for anyone to suggest that we need not worry about ballistic missiles. The number of countries that have these weapons is increasing every year. The number of total ballistic missiles on the face of the earth is growing every year. Their ranges are increasing and the weapons that they mount on the ends of these missiles are increasingly powerful.

CAVUTO: Having said all of that, you're a pretty good money man as well. You know the numbers from your Wall Street days and your industrial days. You know what's happening on Wall Street. Then you submitted a $35 billion budget increase; you got about half that. Are you hamstrung?

RUMSFELD: We have a $22 billion increase over the last budget, proposed by the president. It's the biggest increase since 1986. It is a 7 percent increase, in real terms. It is a larger increase than any other department of government in percentage, as well as absolute terms.

Now, the problem is that at the end of the Cold War there was a drawdown and a so-called peace dividend was taken, but the last administration over-shot, and year after year after year the Defense Department was underfunded. There isn't any way in the world you can correct year after year of underfunding in a single year. It is correct to say that there are a good many of the accounts in the Pentagon that are extremely short.

CAVUTO: Are you frustrated with the process?

RUMSFELD: No, I'm not frustrated. I've been around this city a little bit over the decades and I think that's to be expected. I've never known a Cabinet officer who didn't wish that their department didn't had more money.

CAVUTO: Got a little bit more money — but the reason why I raise it, sir, is Bill Kristol and Robert Kagan in the Weekly Standard had offered some editorial advice not too long ago that you're very familiar with — some unsolicited advice they said for two old friends, Donald Rumsfeld and Deputy Defense Secretary Paul Wolfowitz: resign.

RUMSFELD: Look, we've been asked by a very fine president to serve our country, and we're here and we're doing it and we intend to do a good job.

I must say, though, that the fact that the Pentagon has allowed the aircraft to age, they have allowed housing to age and go into disrepair, our shipbuilding budget is down to the point where the total numbers of ships is heading from 300 down to 230. That fact — that it has been seriously underfunded by the prior administration — clearly creates an impetus to see if we can't manage this place better.

CAVUTO: You know, Senator Hillary Clinton took great offense to that and raised that with your Deputy Secretary Wolfowitz on that very issue, saying that it wasn't — obviously referring to her husband — his fault for this; that this is something and a mess that he inherited from the president's father. What do you make of that?

RUMSFELD: Well, it's factually not true. The reality is that at the end of the Cold War there was a draw-down for a period of years during President George Herbert Walker Bush's presidency. When Mr. Clinton came in eight or nine years ago, the draw-down continued and it continued for a sustained period of time to the great detriment of the Department of Defense.

CAVUTO: Were you surprised by her...

RUMSFELD: And let there be...

CAVUTO: I apologize, sir, but were you surprised by her vitriolic attack? It was pretty strong.

RUMSFELD: I haven't even read it. I knew nothing of it, so I couldn't be surprised. But it's factually inaccurate.

CAVUTO: OK.

Let me get a sense of where you see the real dangers. You know, a lot of people are making a big deal of this China-Russia pact that's been signed. Some are reading all sorts of sinister motives into that. Are you worried?

RUMSFELD: No, not at all. Look, they've got a very long border. They've had a history of difficulties between them. Their relationship ebbs and flows and it's perfectly proper for two countries to meet, as they do. I think that there's no question but that Russia is feeling demographic pressures in the eastern portion of their country. I also recognize that they have a relationship with China that is in a significant way dependent upon their willingness to sell weapons to China. And they're looking for hard currency, just from a pure economic standpoint. So they are selling a great deal of — compared to China's military capabilities, the weaponry that the Russians are selling is considerably more sophisticated.

CAVUTO: Do you think the tax cut has limited your options, sir?

RUMSFELD: Well, I guess time will tell. I know everyone's running around saying, "Henny Penny, the sky is falling," because the projections are lower than had been anticipated and because the Congress took a step to move the tax reduction forward, which ate up a lot of money in 2003. But I've never seen any of those projections that prove to be accurate. I suspect that the economy will recover somewhat and that we'll see increased revenues. And I intend to see that the Department of Defense gets its full share.

CAVUTO: Were you worried, though, Secretary, when you saw that a lot of the tax cut would be at least a little more front-loaded than was the original plan, that you said to yourself, "Oh boy, there go my defense spending plans."

RUMSFELD: Yes. When the Congress moved the tax cut forward, there's no question but that it made our efforts somewhat more difficult.

RUMSFELD: On the other hand, as I say, it does provide an incentive for us. This department is not operating efficiently. There are things we can do by ourselves to make it operate better, improve our acquisition systems, improve our financial reporting systems. We need to have a base closing round. It's just — no corporation, no enterprise would ever carry around 20 to 25 percent excess infrastructure that we don't need.

CAVUTO: I apologize. Do I understand you, then, that it would be a realignment? The missile-type expenditures that you want to see, it would come at the expense of more base closings — maybe shutting down part or all of the B-1 bomber building. Is that what you're envisioning — something like that?

RUMSFELD: No. As I say, the missile defense expenditures are only about — the national missile defense — about 1.5 percent of the budget. What I'm saying is that we need funds to modernize and to transform the defense establishment to fit the 21st century. We're getting a big slug as a result of the president's budget increase of $22 billion. We need more than that, and we've got to go find savings where we can get that. And I've never seen an organization that couldn't save and operate more efficiently by at least 5 or 10 percent.

CAVUTO: Mr. Secretary, you know, the president came under attack the other day from Senate Majority Leader Daschle, who had said that because of him, we're losing some of our international prestige. He rescinded those remarks when he appeared to have made them just as the president was taking off to Europe. But it does raise an issue that others have raised even outside the capital, that the president has to be more outside on these international issues, has to be more involved in international lending, has to be playing a bigger role in the Middle East. What do you think about that?

RUMSFELD: Well, two things. First, I think Senator Daschle, who is in my view a fine man, made a very serious mistake, both with respect to substance and timing. And I suspect he feels badly about it. Second, the president of the United States is in Europe. He is very interested in the foreign policy and defense policies of the United States and in contributing to peace and stability in the world. And as a matter of fact, I talked to him this morning, and I think that he will do a superb job. And any suggestion to the contrary, it seems to me, is mis-targeted.

The fact of the matter is that leadership means that you chart a path that you're convinced is in the best interest of your country and your close friends and allies and associates. From time to time, people differ as to what that direction or calibration ought to be. In my view, the president has staked out ground that is the high ground, the correct ground and the correct direction. And what we will find is that a number of the countries that have been timid, questioning and uncertain about that, we'll find them over the next year or two or three very much supportive of those directions.

CAVUTO: One very last question, sir, and it concerns what you touched on at the outset — the Europeans and our relationship with the Europeans — nixing the GE-Honeywell deal, getting tough on us on some of these defense initiatives that you advocated. Are there serious problems between us? I mean, do the French hate us? Are the Germans ganging up on us? What's going on there?

RUMSFELD: Well, I lived in Europe when I was U.S. ambassador to NATO in the 1970s, and have a great many friends in Europe and spend time there. I see them here in the United States. Europe is struggling. Europe is not a Europe. There is not an entity of Europe. It's a piece of real estate with a number of small, medium- size nation-states on there that for a number of decades have not been able to quite come together into a country or an entity.

They've made strides. They've moved forward, then they've stepped back a bit. And it's been a difficult path. They have all decided today and in recent years that — it seems to have decided — that their best interest is by trying to work together. But they're struggling with it and they're contesting among themselves as to what they think about these various issues — political issues, economic issues. They're struggling.

And dealing with that kind of an evolving non-entity — not a country, but something other than a country — a collection of countries trying to work together is not an easy thing to do. It would be an awful lot easier for the United States of America if Europe were a country and you could deal with it as you do other nations.

RUMSFELD: But because they're evolving and struggling and competing among themselves, the French and the Germans and the Brits, as to their position and their role in this evolving entity, it seems to me that we're just fated to be living at a time when it will be somewhat difficult to work with them, although it's very much in our interest to do so and certainly in theirs.

CAVUTO: Mr. Secretary, thank you very much. We enjoyed having you.

RUMSFELD: Thank you.

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