When: Today, January 7 at 7PM ET

Where: CNBC's "The Kudlow Report"

Following is the unofficial transcript of a CNBC interview with Senator Jeff Sessions tonight on CNBC's "The Kudlow Report" at 7PM ET.

All references must be sourced to CNBC.


LARRY KUDLOW, host: All right. Senator Jeff Sessions, ranking Republican member of the Senate Budget Committee, welcome back to the program and happy new year, sir.

Senator JEFF SESSIONS: Thank you. Happy new year.

KUDLOW: Senator, let's talk about the important Bernanke hearing this morning. You were there. He was a little bit more optimistic and, of course, he defended the $600 billion QE2. Are you convinced of QE2?

Sen. SESSIONS: No, I'm not, but maybe history will record I do think Mr. Bernanke has a little bit more belief that he's controlling this massive worldwide economy than he is. The stock market went up, and so he indicated QE2 was working. And we have a modest improvement. He thinks that's exactly because of what he did. And I really think we need some humility there. He did acknowledge--with a smile, at least--that he missed the mortgage crisis when it--and that was a pretty big miss. So I'm not sure they're as competent and have the capacity to understand what's happening in this great economy of ours as some seem to think.

KUDLOW: Do you think he is credible, regarding an exit strategy--he talked a little bit about that this morning. He may have talked about it with you—an exit strategy so they--we can avoid future inflation and we can protect the dollar? Are you as confident as Bernanke?

Sen. SESSIONS: No, I'm not. He certainly--his statement was very strong that he had the--but when questions, he said, `We have the tools to exit safely from the market,' but he didn't say he knew--he finally admitted, `Well, we could be a little early or a little late.' But for a man who missed the entire mortgage crisis, I'm not too sure we can just be certain that these guys have the ability to be in and out.

KUDLOW: Do you share Bernanke's relatively optimistic view? I mean, unemployment did fall a bit today. President Obama talked about it in Landover, Maryland. Mr. Bernanke was a little more upbeat today. What is your assessment as you go into all the various tax and budget hearings coming up this winter, what is your view of the economy?

Sen. SESSIONS: I believe the economy can come back and I believe it will be coming back. I think it would be coming back today, Larry, if we hadn't done some of the things that have been done, maybe even better. If we hadn't thrown so much federal dollars at this economy, we might be in even better shape. So I do think this resiliency, this marvelous American economy, it's hard to keep it down, frankly, and so I'm cautiously optimistic, and hopefully--but if we don't get the cloud of debt off our economy, I do think that is--has the danger of constraining our growth. As Rogoff and Reinhart wrote, when you reach 90 percent of GDP, your debt is equal to 90 percent of GDP, then you have 1 percent less economic growth historically. If that's true, we're damaging our economy because we're already at 1 percent of GDP—I mean, 90 percent of GDP.

KUDLOW: I want to come back to the budget battle in one second, but just a last one on Bernanke and the hearing this morning. The Fed had said basically the Federal Reserve would not bail out states if they got into more trouble and threatened bankruptcy. What's your feeling? Did you talk--did you engage him on that point? Is that going to be a hard and fast rule, no federal bailouts of states?

Sen. SESSIONS: Senator Cornyn and I raised it, and I followed up with it and got a pretty firm commitment that they had no intention of doing that. And he indicated they have very limited legal powers to do so, only in very short-term loans. I think that was a message to every governor and every state legislature that the federal government is not here to bail them out and they've got to maintain their own credit rating, they're sovereign states and they cannot continue the reckless spending that some of these big states are doing. My people in Alabama that run a frugal government don't think they should be paying to bail out reckless states like California or Illinois. And you see New Jersey, Governor Christie marvelously bringing his state under control. We need to see that from some of these other states.

KUDLOW: Senator, will that be Republican policy, not just for the Federal Reserve, but regarding federal spending? Will Republicans oppose any bailouts of states or localities?

Sen. SESSIONS: I'm confident that they will. When you say any, I don't—I don't know exact--what could occur, but I don't think that this federal government should be bailing out states, and I do believe that they need to recognize the crisis they're in and start bringing it in under control like New Jersey has. And if so, we won't have a default crisis.

KUDLOW: And finally, sir, the budget wars will begin soon. You're the ranking Republican now on the Senate Budget Committee, which is going to be a very key spot, let me ask you, can we, the taxpayers in the country, get a substantial budget-cutting, budget-capping deal?

Sen. SESSIONS: I think so. But I do believe some in Congress still haven't gotten the message of this election. The American people don't think that when Governor Christie cut education 8 percent or other agencies 30 percent and 20 percent, that if--they think we can do that in Washington, and we can. And it's not going to devastate this nation. We can have reductions, but right now the--a number of our people are in denial. They think we can get by without cutting discretionary spending. I think that's a mistake. And then we've got to wrestle with the long-term entitlement problems and bring those under control, also.

KUDLOW: Do you think it will be possible for you and other senior Republican officials to do business with the newly constituted Obama White House, in particular new chief of staff Bill Daley? Is there an opening there? Will relations be better there? Do you think we can reach agreement there on broad-based budget cuts?

Sen. SESSIONS: I think it's possible, but I'm less confident that this White House is willing to do what it takes than some of my colleagues are. We'll just see. I'm hoping--hopefully I'm wrong, but we really do need a significant change in direction. And, Larry, I think it's a cause of concern throughout our country, and for me, that we've had so much turnover in the economic team in the White House. The president himself is not an economist, he's not experienced in these issues. So it's really important that we know what this new team means as a matter of policy. And I believe our president, if he's going to call on the nation to make some sacrifices, need to put that in the context of a revitalized, competitive, growing America like David Cameron is doing in England, where they're making reductions in spending and developing a plan that would promote growth.

KUDLOW: And finally, on that growth point, on the supply side, briefly, sir, is there room for a corporate tax cut in the whole budget bill, the omnibus budget bill that's coming up? Do you reckon a corporate tax cut is possible?

Sen. SESSIONS: I think it is possible, and it's important. Like the—Canada is going to 15 percent corporate rate. The Brits are dropping their corporate rate significantly. We've got to get our 35 percent corporate rate, the highest in the world--developed world, virtually, down. And it can't just be by eliminating loopholes and bringing it down a few percentage points, frankly. I think we need to be competitive in the world marketplace on corporate taxes or we are going to lose jobs. A matter of fact, I know of a major international company that would've developed in my state, but when they calculated taxes, they decided to go to another country. And we would've won that competition, except for tax rates.

KUDLOW: All right. We'll leave it there. Senator Jeff Sessions, ranking Republican on the Senate Budget Committee. Again, thank you, sir. Thanks for helping us.

Sen. SESSIONS: Thank you.

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