This is a partial transcript of "Special Report With Brit Hume," August 9, 2005, that has been edited for clarity.

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(BEGIN VIDEO CLIP)

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: Job growth is strong. We added over 200,000 new jobs in July. This country has added nearly 4 million new jobs since May of 2003. The unemployment rate is 5 percent, which is below the average of the 1970s, 1980s, and 1990s.

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JIM ANGLE, GUEST HOST: The president argues the economy is in pretty good shape, as you heard there, even though he points out some problems caused by high energy prices and the cost of health care. But one poll after another indicates many people don’t quite believe it.

So how good is the economy? And what does it mean for your future? For answers, we turn to Jim Glassman, financial columnist and resident fellow on economics at the American Enterprise Institute (search ).

Jim, thanks for joining us.

JIM GLASSMAN, RESIDENT FELLOW, AMERICAN ENTERPRISE INSTITUTE: Thank you, Jim.

ANGLE: So the president talks about this all of the time. We see the unemployment (search) numbers at 5 percent, which used to be lower than anybody thought was possible. Where are we in recovering from the problems we had three or four years ago?

GLASSMAN: The economy is in really good shape. Let’s be clear on that. We’ve had consistent growth, really, now for two years. Unemployment’s low. We’ve created 1.3 million jobs since the beginning of the year.

Inflation’s relatively low, but Americans still feel uneasy for, I think, a number of reasons. But the economy itself is doing very, very well.

ANGLE: And in fact, the Fed raising interest rates for the tenth time today is, in some ways, a reflection of the fact that the economy is steadily growing and they want to be out front and keep it from growing so fast that we would encounter inflation.

GLASSMAN: That’s absolutely true. It’s a bullish sign that the Fed is raising rates. I don’t think that the rate increases are going to go on for much longer. We’re now at 3.5 percent for the very short-term rate that the Fed controls. We may go to 4 percent.

But, yes, the Fed is a little bit worried that the economy might overheat. And I don’t think that’s going to happen. It really is very much like a Goldilocks economy, as we had in the mid-1990s, but in some ways better, because we’ve been chastened by the excesses of the ‘90s.

ANGLE: Now, let’s look at what other industrialized economies are doing. If you look to Europe, we don’t just look like we’re in good shape; we look like we’re in fantastic shape.

GLASSMAN: Yes. Yes, we really do. And, you know, this is part of a trend that’s been going on for 10 or 15 years now. But Europe is growing — while we’re growing at about 3.5 percent, maybe as much as 4 percent by the end of the year, Europe’s growing by about 1.5 percent, in some cases some countries 2 percent.

We’re growing more than twice as fast as Europe is.

ANGLE: And high unemployment.

GLASSMAN: Oh, yes, yes. France and Germany have unemployment in the double digits, over 10 percent. We’re doing much better than Europe is. And we’re doing much better than Japan is.

ANGLE: Can you imagine what it would be like in the United States if we had 10 percent unemployment?

GLASSMAN: Yes, I don’t think Americans would tolerate that very much. You know, Europe is different. I mean, Europe is not a pro-growth kind of society, and partly because they have high taxes, more government intervention, and a welfare state that sort of cushions people who are unemployed but also encourages them to be unemployed. And it’s not the kind of aggressive economy that we have, no.

ANGLE: Now, we look at one poll after another. And even though people in some polls will talk about their own economic situation being good, that they think they’re doing fine, when it comes to extrapolating for the economy as a whole, people don’t quite have the sense — they’re not quite convinced that things are going all that well.

Is this just the lag time that you usually have, or is there something more at work here?

GLASSMAN: Well, I think there are three things going on. And first and probably foremost is Iraq, that even though people are responding to a question about the economy, really what’s on their mind now is the war in Iraq, the fact that we do have American troops there who are dying.

And that kind of casts a pall on everything. It has not really had an effect on the real economy, but it does have an effect on people’s attitudes.

Second, what you said about the lag times, this has always been true. The economy recovers. People don’t quite believe it or they — there just is a period of maybe two years between the time they say, "Hey, yes, things are good," and the times that things have really gotten good.

And I would say the third thing is gas prices, that, at this point, Americans are beginning to feel that these high prices we now see for gasoline are not just a blip. They’re not just temporary, but they’re going to be sustained over a long period of time. That bothers them.

But really much more important than that is the actual — much more important than people’s opinions is the actual output of goods and services, the fact that unemployment is low. The economy is doing well.

ANGLE: Now, didn’t it used to be the case that the economists argued that you couldn’t have unemployment below 5.5 percent, or else you would have inflation totally out of control?

GLASSMAN: Right. Right. I mean, that was called the Phillips curve (search). And that was pretty much repudiated in the 1990s. You know, we have — we should have lower unemployment than we have now. I don’t think we should be satisfied with 5 percent. And we’re going down. Almost certainly, we will get into the fours.

But, yes, in the past, those kinds of low unemployment rates were associated with high inflation rates. We don’t have high inflation. And there are a number of reasons for lower inflation, even though the economy is growing quickly and unemployment is low.

And one of the main ones is that we do have a lot of trade with other countries. And that’s — by the way, that’s good. In some ways, it provides competition. It may put some Americans out of business, but, in general, it lowers prices.

ANGLE: About 30 seconds left. The president was looking at some problems today, too. He identified energy prices as one, health care costs another. Do you see any major problems on the horizon? Just a few seconds left.

GLASSMAN: I think the only thing really is high real estate prices in a few markets, that they really have gone bonkers in a few markets. I do not think there’s a national real estate bubble (search), but the key really is the high energy prices that you cited. And, by the way, I don’t think those are going to be sustained for a long period of time.

ANGLE: OK, Jim Glassman, thanks very much.

GLASSMAN: Thank you.

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