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The Struggling Economy

March 10, 2003 at 12:00 AM EDT


RAY SUAREZ: Recent economic signs from Wall Street to Main Street have been troubling. Today’s market losses continued a fall that has unnerved many investors. In fact, it was three years ago today that the technology-heavy NASDAQ reached its peak of 5,048. Today it closed at 1,278.

On Friday the Labor Department said unemployment was up to 5.8 percent. Businesses cut more than 300,000 jobs, the most in a single month since right after the 9/11 attacks. Also on Friday, the Congressional Budget Office put out new deficit projections, totaling more than $1.8 trillion over the next ten years, if the president’s plans were enacted. Those figures do not include the costs of a war with Iraq. And consumer confidence plunged last month to its lowest level since October 1993.

To look at these signs and what might lie ahead, we get two views now. Gail Fosler is chief economist at the Conference Board, a global research organization that tracks economic indicators. And Robert Kuttner is an economics writer and co-editor of the “American Prospect,” a biweekly magazine.

Gail Fosler, how much is anxiety over a possible war responsible for slow growth and some of the lagging indicators that we’re seeing in various parts of the economy?

GAIL FOSLER: Well, when you look at the fall of consumer confidence, you certainly see this big disconnect between the job market, which is not good but it’s not that bad, and what people fear for the future. You know, while people are obviously concerned about jobs, they really have a concern about deteriorating business conditions, and their own personal income that’s some of the worst that we’ve ever seen in the survey. People are very unsettled by that, which they cannot understand or even imagine. And this war is having a really corrosive effect on consumer confidence.

RAY SUAREZ: Robert Kuttner, do you agree with Gail Fosler that the situation really has some strong points underneath, but it’s being obscured by the war?

ROBERT KUTTNER: No, I think the situation is pretty soft underneath, and a bad situation is being made worse by the war. I think we’re still suffering some of the fallout from the stock market collapse. We have a number of industries that are very weak, where you still have over-capacity that hasn’t fully been soaked up. We have the Fed having used interest rates about as much as it can use interest rates to keep the economy going, that string is about played out. So I think the underlying conditions are somewhat softer, even apart from the softness caused by the war.

RAY SUAREZ: And what about the possible cost of the war, how does that insinuate itself into an economy as big, as vast, as complex as ours?

ROBERT KUTTNER: Well, I think if you start with the fact that we’ve got a budget deficit for this year, this coming fiscal year projected by the president at $304 billion and that figure does not even include the war, so once you count the war, the deficit is going to be more like 400 or over $400 billion. And then on top of that, President Bush wants to really punch a number of holes in the tax code so that we will have gone from a situation of surpluses as far as the eye can see to deficits as far as the eye can see. I think at some point the money markets look at that, the money markets don’t like it, and if that were to translate into pressure to put up interest rates, we’d be really in trouble because the low interest rates are really the only thing that’s keeping the economy a float.

RAY SUAREZ: Gail Fosler, talk a little about what it means to wait and see what happens with the war. I mean, there are a thousand ways this could play out, a short war, a short occupation, a long war, a long occupation. What does the cost of the war and waiting to see what happens do to an economy?

GAIL FOSLER: Well, I really think there’s two different groups that we have to focus on here. I mean, I talked about the consumer, and obviously the consumer is concern concerned. But the consumer is also benefiting from some unusually good conditions — record low financing costs, continued rises in wages, as bad as the employment report was it suggested that wages and salaries were continuing to grow — almost no inflation in the good sector outside of gasoline. So consumers are concerned about the future, but they really have a lot of incentives to keep on spending in the present. This actually works in the reverse in the business sector because businesses have worked very hard over the last two or three years in order to restore their profitability and improve their balance sheets, and they’re really afraid of being caught, exposed, with higher inventories or capital spending requirements. So businesses have a lot of disincentives to spend and we actually think that that’s going to slow the economy near-term.

RAY SUAREZ: Robert Kuttner, consumer spending was supposedly, what many analysts said was keeping the economy in the game last year, people were cashing out equity from their homes, taking advantage of low interest rates to buy automobiles. Why that number, 308,000 job losses in one month?

ROBERT KUTTNER: Well, it’s the flip side of businesses slimming down. When — 70 percent of what businesses spend of course are labor costs — and when businesses slim down, that means either they layoff people, they don’t create new jobs, they put people on shorter work week, they don’t give people raises, and of course that affects consumer spending. So if you see your neighbor or your co-worker losing a job, not getting a raise, you think twice about going out and spending — so that you’ve got the two sides of this equation kind of at war with each other, and the result of that is that if people don’t go to the store and buy products, then businesses don’t invest in new factories.

RAY SUAREZ: And Gail Fosler, taking into account what Robert Kuttner just said and your own feelings about the underlying strength in the economy, is this something that dams up demand behind war anxiety that once the situation is settled one way or another, people start to go ahead and make deferred investment, start to hire when they didn’t before?

GAIL FOSLER: I think the answer to that is just, clearly, yes. I mean, we have…businesses have really not been investing in any, to any degree for the last three years. We have to remember that most business investment is information and communications technology, it’s not the old-fashioned sort of plant and equipment. And information and communications technology is very short-lived, it doesn’t last very long, there’s only so many times you can fix your laptop. And actually the technological frontier continues to move forward.

So businesses have a lot of pent-up demand, but it’s just really hard when you don’t know, you can’t foresee what’s going to happen over the next couple months, to really put that pen to paper and sign that major new systems integration contractor — make that new commitment for that new infrastructure overhaul. It just breeds a wait and see attitude.

RAY SUAREZ: But can you, Robert Kuttner, wait and see a lot longer than you might otherwise? Is there a sort of time lag beyond when you start to relax a little and when you actually do something about it?

ROBERT KUTTNER: Well, I think you’ve had fairly long periods in the history of this economy where demand is soft and as a result of that, businesses don’t invest. And I think, as I said before, the combination of the continuing effects of the stock market meltdown on consumer spending, and the fact that we are in an uncertain international period, even if the war goes relatively well, the threat of terrorism will not disappear. I think that exacerbates the sense of uncertainty. And I think you add to that the federal budget being handled in a very irresponsible way, that adds to the sense of uncertainty. So I think surely things will be better if the war were called off, or if the war were successful. But I didn’t don’t think that’s going to solve everything that ails the economy.

RAY SUAREZ: Do you worry about deficits, Gail Fosler?

GAIL FOSLER: I worry about deficits, I guess, generically. But I don’t worry about deficits in the current environment, because other than the consumer we have no one else, businesses are not out there borrowing, and actually I think the federal government in some almost Reagan-esque way is providing this counter cyclical stimulus now – it’s in a very perverse way. But I think that actually federal borrowing is sort of taking up some market slack. I mean, we see the appetite for investment in treasuries and in the past when we had uncertainty, interest rates went up. Now we have uncertainty and interest rates go down, so it certainly suggests that the federal borrowing is not putting any pressure on the financial markets.

RAY SUAREZ: Robert Kuttner?


RAY SUAREZ: Go ahead.

ROBERT KUTTNER: It’s very important not to confuse the short-term situation with the long-term situation. Short-term in a weak economy, you do need to have deficits; you do need to have public investment, you do need to have government borrowing. But that’s very different from saying that it’s a good thing to blow a hole in the tax code that’s going to lead to chronic deficits year after year, decade after decade. That’s what we spent the 1990s digging out from, and here we go again. So I think yes, we certainly ought to have short-term stimulus. But we shouldn’t have ten or twenty years of chronic deficits because of tax cuts.

RAY SUAREZ: Robert Kuttner, Gail Fosler, thank you both.