TOPICS > Economy

Economic Stimulus

November 23, 2001 at 12:00 AM EDT


RAY SUAREZ: With the turkey eaten, the shopping usually follows. But this year, the Christmas shopping season opens amid a troubled economy and a congressional debate over what to do about it. Kwame Holman begins our report.

KWAME HOLMAN: Discount chain Target opened this suburban Washington, DC, store at 7:00 this morning. Two hours later, it was moderately crowded. Shoppers came expecting, and finding, big discounts.

ROBIN WHITMORE: Sales are great out here. Demand seems to be high, so shop early and you get the best selection.

KWAME HOLMAN: The economy began slowing early this year, then was buffeted by the September attack. Some shoppers came to do their part to invigorate the economy; others were wary of spending too much.

ALIYAH JONES: I think that we’re heading into a serious recession and you need to watch your spending, and you can’t spend like you used to spend because you don’t know what tomorrow’s going to be like, so you need to conserve and save for the next day.

KWAME HOLMAN: There’s reason for caution. Last month, unemployment went up sharply to 5.4 percent, the highest rate since 1996. 400,000 jobs were lost. In the third quarter, which ended October 1, Gross Domestic Product fell at an annual rate of 0.4 percent. But recently there have been positive signs. Retail sales rose more than 7 percent in October, the largest one-month increase ever recorded. Nonetheless, despite ten straight interest rate cuts by the Federal Reserve since January, many experts believe the economy is in a recession that began in the spring. For his part, President Bush is looking for help for the economy from Congress. On Monday, he again prodded lawmakers to end weeks of partisan wrangling and send him an economic stimulus package of tax cuts and new spending.

PRESIDENT GEORGE W. BUSH: I hope I’ll be able to sign an economic stimulus package. I think I will be able to do so, but it’s going to require the senators to come together and move a bill, and then we can reconcile the differences with the House version.

SPOKESMAN: The majority having voted in the affirmative, the motion is passed…

KWAME HOLMAN: The House of Representatives late last month passed a Republican-designed economic stimulus bill. At a cost to the Treasury of about $110 billion, its main features include accelerated tax write-offs on equipment purchased by businesses worth $39 billion; repealing and for a few companies refunding the corporate alternative minimum tax, which limits corporate tax deductions, $25 billion; tax rebates of $14 billion to low-income workers who didn’t qualify for them under last spring’s major tax cut; speeding up an income tax rate reduction from that tax cut, $13 billion; extending unemployment benefits by 13 weeks, $9 billion; and subsidizing health insurance premiums for the unemployed, $3 billion. Democrats called the bill unbalanced.

REP. SHERROD BROWN, (D-Ohio): If you’re a major corporation, this legislation is for you. But if you are a laid-off worker, if you don’t have health insurance, this bill is woefully inadequate. The GOP bill gives damn near everything to many of America’s largest corporations.

REP. CLAY SHAW (R-FL): When you start hearing about all of this money going to these corporations and big businesses– that’s where the jobs are! There is a basic difference between the Democrat and the Republican bill. The Republican bill believes in the preservation and creation of jobs.

KWAME HOLMAN: The partisan lines were drawn just as starkly in the Senate, as the Finance Committee took up a democratic stimulus bill.

SEN. PHIL GRAMM (R-TX): In all the years that I’ve been in the Senate and the House and all the years I’ve watched this committee, the product we are producing today is rank partisanship in the clearest form that I have ever seen it since I’ve served here. To save my life, I cannot understand how this produces the end result that we all want and that we all, I believe, think will be required in order to pass a bill.

SEN. TOM DASCHLE (D-SC): I think that this is the right plan at the right time. In the month following the terrorist attacks on our nation, 415,000 people lost their jobs. It was the biggest one-month increase in joblessness in America in 21 years. All told, 7.7 million Americans who want to work are without work today.

KWAME HOLMAN: Senate Democrats’ stimulus package has many of the same features as the House Republican bill, but in mirror image; at a cost of $66 billion, it leans heavily toward spending instead of tax cuts. Like the Republicans, Democrats also would spend about $14 billion on tax rebates for low- income workers, but Democrats would extend unemployment benefits by $14 billion– $5 billion more than the Republicans. And subsidize health insurance premiums by $12 billion, far more than the Republican plan. Democrats would accelerate tax write-offs for businesses, but by only $19 billion, about half what Republicans want. And some Democrats also want a separate package of spending on homeland defense, $15 billion to prepare cities for bio-terror attacks and to build roads and bridges. Trying to bridge the gap between the Democratic and Republican approaches to economic stimulus will be a major item on President Bush’s schedule early next week.

RAY SUAREZ: And our man on the economy, Paul Solman of WGBH Boston, has more.

PAUL SOLMAN: Well, to help us evaluate the economy at the moment, and how the government hopes to stimulate it, we’re joined in New York by Joseph Stiglitz, awarded the Nobel Prize in economics last month, former chairman of the Council of Economic Advisers during the Clinton administration and former chief economist at the World Bank. He’s now a professor at Columbia University. Ken Kies is a managing partner at Price Waterhouse-Coopers who served on Capitol Hill as chief of staff for the Joint Committee on Taxation in the mid-90’s. And David Wyss is chief economist and forecaster at Standard and Poor’s, an economic research and rating firm. Welcome, all.

So David Wyss, it’s the first day of the shopping season officially. Where, unofficially, is the economy at?

DAVID WYSS: So far we’re doing better than I thought we would. We’re in a recession. Clearly the events of September 11 pushed us over the edge. We’re going to stay in the recession. It’s not over yet. But if nothing else happens it looks like the consumer is reviving relatively quickly. That should keep the recession relatively mild. I think it will be over by the spring. That if is a big if.

PAUL SOLMAN: 415,000 jobs lost, we heard Senator Daschle say. I mean that’s a huge, huge rise in the unemployment rate, the greatest in I don’t remember how many years but 25, 30 years, something like that.

DAVID WYSS: It is going to continue. We’re not done with the layoffs. You’ll see more layoffs continuing. We expect the unemployment rate to be up by 6.5 percent by next summer. That would be the lowest peak unemployment rate since we’ve seen in any recession since 1960.

PAUL SOLMAN: Professor Stiglitz, are you as sanguine as David Wyss here?

JOSEPH STIGLITZ: First, I point out that the loss to the economy of output being three, four, five percent below its potential is enormous. It’s not just whether we’re in recession. It’s whether… How much we’re losing. It’s not only the jobs are being lost. We’re losing at a rate of about 400 billion, 350 billion a year. That’s a lot. It’s not just whether we’re in decline. It’s that we’re not living up to our potential.

PAUL SOLMAN: You mean that’s how much the economy would have grown if we weren’t in recession?

JOSEPH STIGLITZ: If we weren’t… If we were living up to our potential and if we weren’t, you know, having jobs destroyed rather than being created.

PAUL SOLMAN: So that’s one bad thing. The other negatives on the horizon for you? I mean, you were here or we interviewed you in January at the American Economic Association conference and you were talking about a downward spiral in the economy. Do you continue to see it spiraling down?

JOSEPH STIGLITZ: Spiraling may be too strong, but, remember, right now we’re one of the great changes is that globalization of the world and right now it’s the first time in a very long time that all three major economies in the world are in a negative having their economy decline. Japan has remained weak and Germany now is also facing decline. So the confluence of these international forces, I think, are another negative aspect of the U.S. economy.

PAUL SOLMAN: And I notice Singapore, for example, Taiwan, those economies which had been going gangbusters for decades are now in deep recession, right?

JOSEPH STIGLITZ: That’s right. I mean, they weathered the big 1997-98 downturn without going into recession. Now they are in a serious recession. If you go to Latin America, there’s also recession in a number of countries there. So if you look at the global landscape, it doesn’t look great.

PAUL SOLMAN: Ken Kies, when you look at either the domestic or local or international economy, what do you see?

KENNETH KIES: Well, Paul, I think we’re facing a very serious situation. Just take the tourism business in the United States. The aftermath of September 11 has crippled that industry, and it’s not likely that it’s going to return anytime soon. The third quarter profit numbers that came in in the last month or so have been bad news left and right. So I think we’re facing a very serious economic situation, and that’s really what puts a lot of pressure on the Congress to produce a stimulus bill, because virtually every person in America realizes that we will be in a recession by the end of this year when we have two quarters of a negative economic growth matched up against one another.

PAUL SOLMAN: David Wyss, are these economists more gloomy than the consensus? You’re a forecaster who is always looking at what everybody else is saying as well as your own forecast.

DAVID WYSS: Well, I think it’s a matter of degree. We know we’re in a recession. I think it was a mild recession, but there’s a lot that could go wrong to make this longer and deeper than we think right now.

PAUL SOLMAN: The thing that strikes me, hearing all three of you. Today the stock market went up by 125 points, 1 point some odd percent. It’s back up near 10,000. That is, the Dow Jones is near 10,000. Doesn’t that suggest that the world in general or investors in general are rather sanguine about things?

DAVID WYSS: Well, it suggests that the market thinks the problem is over. We’re in a recovery. The timing is about right. If you think the economy will bottom next spring, the stock market normally bottoms six months before the economy. We’re now officially back in the bull market. We’re up 20 percent from the bottom. Yeah, the market thinks it’s over. The market is not always right.

PAUL SOLMAN: Professor Stiglitz, the market is not always right, right?

JOSEPH STIGLITZ: That’s for sure. We had the dot-com bubble and everybody said, you know, great news. Then it burst. I think the important thing is that there is a lot of uncertainty. And that’s why it’s important to have a stimulus package that is what I call flexible and effective. That if the economy gets worse, it will feed in automatically. If things don’t get bad, then it won’t spend more. That’s why a focus on unemployment, a focus on helping the states who are facing a shortfall in their revenues, these kinds of things, flexible packages really can make a difference and appropriately designed for the kinds of uncertainty we’re facing.

PAUL SOLMAN: And which of the two stimulus packages that we saw outlined in Kwame’s piece more nearly fits with what you’re talking about?

JOSEPH STIGLITZ: The Democrats fix that. Much of the expenditures, tax cuts under the Republican proposal are going to come into place well after even the more pessimistic of us think that the economy will be in recovery. It’s just a corporate give-away. It’s not really a stimulus package. It’s an embarrassment that it’s being sold as a stimulus package.

PAUL SOLMAN: That is the House bill. What you’re calling the Republican bill is the House bill. Is that right?

JOSEPH STIGLITZ: That’s right, and the Senate version of the Republican bill in some ways is even more problematic.

PAUL SOLMAN: Ken Kies, make the case for the House bill.

KENNETH KIES: It’s both the House bill and the President’s bill. The case is simple. Corporate America is what drives the economy. It represents 69 percent of all jobs in America. 75 percent of all wages because they’re better paying jobs. Eighty-three percent of all exports. And it represents 75 percent of all the R&D that’s done in the United States. Professor Stiglitz is actually wrong about its impact. The repeal of the corporate AMT and the refundability of the credits would all happen within the first couple months. It would push $20 billion-some into the U.S. economy immediately. The same thing try is of the carry back provision. It would push money out there and operating loss carry back. I know.

PAUL SOLMAN: That was great.

KENNETH KIES: We want to make sure everybody knows what we’re talking about.


KENNETH KIES: But it would help companies that are incurring big losses this year, the airline industry and others who are going to have a big loss when they get to the end of this year would be able to take that loss and apply it against income they earned in a prior year.

PAUL SOLMAN: Now, these are tax breaks that the companies would get either for…because they would otherwise have paid this alternative minimum tax or they have lost money and could apply it to back taxes, is that correct.

KENNETH KIES: That’s correct. In the case of the corporate AMT…

PAUL SOLMAN: Alternative minimum tax.

KENNETH KIES: Yes. It is not a tax credit like the government gives for people doing things like burning chicken manure. It’s a credit because they’ve already paid tax and they’re going to be allowed in the future where the law is changed or not to apply that credit against the future tax liability. What the House bill would do is let them get a refund of that early. They would be able to use that money to avoid layoffs, to do R&D, to handle capital expenditures that they’re going to have to put off because of sagging profits. For all those types of things this would be a significant infusion of money that would help to give the economy a boost. It puts it right where it belongs, which is where most of the jobs are.

PAUL SOLMAN: So, Professor Stiglitz, what’s wrong with creating jobs? It sounds almost obvious.

JOSEPH STIGLITZ: It’s the wrong way. Think about the big bailout of the airlines. The airlines got the money. They went ahead and laid off all the workers anyway. The point is that you need to have not just a corporate giveaway. You need to have something that will generate new employment. Investment tax credit that would encourage firms, give them money if and only if they create new investment. That’s something that will work. But just giving them money in a world in which a lot of these firms have excess capacity is not going to generate investment.

PAUL SOLMAN: What do you mean excess capacity?

JOSEPH STIGLITZ: Well, in a lot of the industries in the United States right now we over invested in the late ’90s. We have excess capacity in telecommunications. We have more wire… More fiber optics than we need. Giving these companies more money isn’t going to lead them to build more fiber optics or to create new jobs. Putting more money into corporate coffers doesn’t necessarily lead to more employment. You need to have a link between the two. Giving money to the unemployed, on the other hand, these are people who really desperately need money. We have one of the worst unemployment systems in the advanced industrial countries. These people are going to take their money and they’re going to spend it just to be able to sustain their standards of living. That will put money into the economy. That will recycle. We call that big bang for the buck because it has what we call multipliers. That helps generate real jobs in the economy.

PAUL SOLMAN: All right. So, last question, David Wyss, you’re in the forecasting business. You’re listening to economists such as these all the time. What are most economists saying about which of these two bills is likely to prevail or maybe better put what’s the likely fate of these two bills?

DAVID WYSS: My guess is we’ll end up with a compromise between the two. Frankly I think both bills are fairly heavily partisan. Coming in between the two is probably not a bad idea. I think that the House bill I like less well than the Senate bill simply because it seems more designed to stimulate campaign contributions than the economy. But I think we need some form of stimulus bill. I’m willing to be reasonably flexible on how we do it. But somehow we got to get this economy moving again.

PAUL SOLMAN: You think that there will be some kind of in between these two bills that will come out of Congress soon?

DAVID WYSS: I think the political cost of not doing anything is too great. Eventually that’s going to force Congress to do something. I’m not sure what. But the problem is Washington is the only city in the world where bipartisan is spelled with four letters.

PAUL SOLMAN: With four letters?

DAVID WYSS: Four-letter word.

PAUL SOLMAN: I see. Let’s leave it at that now that I get the joke. Thank you all very much. Appreciate it.