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Economic Forecast

January 11, 2001 at 12:00 AM EDT


PAUL SOLMAN: New Orleans — home to blues in the streets, psychics on the sidewalks and in 2001 the annual convention of America’s economists — the first one in years to take place amid a barrage of bad news. The professionals read headlines much as the rest of us do. John Taylor was Bob Dole’s chief economist.

JOHN TAYLOR: We’re in a slowdown. You can see that in the numbers already.

PAUL SOLMAN: Joe Stiglitz is former head of President Clinton’s Council of Economic Advisors.

JOE STIGLITZ: The dangers of a marked slowdown are clearly there.

PAUL SOLMAN: Paul Romer is a political moderate.

PAUL ROMER: Everybody– Democrat, Republican– agrees that there’s been a slowdown.

PAUL SOLMAN: And, says conservative Alan Meltzer, everyone agrees that a slowdown hurts.

ALAN MELTZER: The economy’s slowing from, let’s say 5 percent — which is what it was doing– to 2 percent, is just the same as going into a recession when you had only 2 percent growth– that is, the pain is going to be there.

PAUL SOLMAN: Now, technically a slowdown is not a recession– that is, six months of negative growth: A shrinking economy. But slowdowns can lead to recessions.

JOSEPH STIGLITZ: As the economy goes down, profits of corporations go down. As profits of corporations go down, they have less money, even… both less incentive and less money to invest. So it feeds on itself, and that leads to an implosion. Given the high level of indebtedness, they don’t want to take on more debt to invest more.

PAUL SOLMAN: And then, of course, if they have lower profits, that means that their stock prices go down; that means that we investors have less in our portfolios; then we’re going to spend less…

JOSEPH STIGLITZ: Exactly. And the fact that savings have been so low, a lot of people… reinforces that, saying, “look, we better start saving more.” And when they start saving more, consumption goes down again.

PAUL SOLMAN: Some economists thought that with the stock market swoon, a downward spiral like this might already be in progress. At perhaps the NASDAQ’s closest kin in New Orleans, Harrah’s Casino, Finance Professor Bob Shiller noted that easy winnings, especially in high-tech stocks, have turned into steep losses.

ROBERT SHILLER: I worry that people will say, “Hey, let’s not buy a new car this year. Let’s not put the addition on house. Let’s hunker down because things are very uncertain.” And in fact, it was the opposite of that that’s happened; that’s been driving the economy. The stock market soaring created in everybody a feeling that nothing can go wrong and this is the time to spend. So consumers last year were spending enormous amounts of money, and that was driving the economy.

PAUL SOLMAN: Most economists weren’t as worried as Shiller. In fact, the major theme in New Orleans this year was how technology has improved the fortunes of the economy and the odds of higher long-term growth. But even optimists admit that short-term prosperity is something of a crapshoot. So how do we prevent the downward spiral? First, the Federal Reserve tries to spark the economy by making money cheaper to borrow. Paul Romer thinks its dramatic recent interest rate cut shows that the Fed can do the trick.

PAUL ROMER: In the current context in the United States, I think there’s no question that the Fed alone could… has enough power to keep us out of… bring us back out of a recession if we go into one, maybe even keep us from going into one. The only exception that economists point to are cases like Japan, where you get into a situation where interest rates have actually gone to zero, and at that point, the monetary authority may no longer have any power. But we’re a long way away from that situation in the United States.

PAUL SOLMAN: Alan Krueger, a Labor Department economist in President Clinton’s first term, thought the Fed did the right thing, though maybe a bit late.

ALAN KRUEGER: I would say 95 percent of the people here said the Fed did the right thing.

PAUL SOLMAN: What percent would you say think the Fed acted too late and should have moved sooner?

ALAN KRUEGER: I would probably say three quarters thought the Fed either moved too late or should not have increased rates earlier in the year.

PAUL SOLMAN: In addition to the Fed’s treatment, there’s a second, more controversial antidote for an ailing economy: A tax cut, being pushed vigorously by Republicans.

JOHN TAYLOR: I think a tax cut is very important to have right now. People look ahead, they say, “Hey, my taxes are going to be lower next year,” so that’s going to affect spending now. People just don’t look at what their paycheck is today, they see what the prospects are down the road as well.

PAUL SOLMAN: Now, Republicans also make the long-term case for a tax cut, and economists here were split on the merits. But as a near-term anti-recession measure, the tax cut was knocked by economists right and left. Democrat Joe Stiglitz:

JOSEPH STIGLITZ: If you think the economy is near a cliff, or if you think it’s going to be a marked slowdown, waiting until the recession is actually there is too late.

PAUL SOLMAN: Even conservative Republican William Niskanen, who favors a tax cut, was skeptical of its short-term benefits.

WILLIAM NISKANEN: The Bush tax plan is slowly phased in over a 10-year period, so it does not have very much immediate imp