The State of the Economy
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GWEN IFILL: And now we convene our own roundtable on the state of the nation’s economy, and the president’s handling of it.
Joining me are William Dunkelberg, professor of economics at Temple University and chief economist at the National Federation of Independent Business, which represents small business owners. Nancy Kimelman, chief economist at SEI Investments, a management firm. Jeff Madrick, contributing economics columnist at The New York Times and editor of Challenge magazine, an economics journal. And Kim Wallace, chief political analyst at Lehman Brothers, a global investment bank.
So, Professor Dunkelberg, what is your sense on whether the president can handle what’s happening with the economy right now, based on what you’ve seen going on so far?
WILLIAM DUNKELBERG: Well, I think we should begin with the fundamental perspective on how much power the president has. One of the real strengths of our economic system here is that we have a weak CEO, and it’s hard for the president to get anything done unless Congress goes along with him.
Then we have to look philosophically at what the president had in mind, that was a little less government, lower taxes, more incentive for investment, and we started off on the right foot. The president got lucky, gave us a well-timed tax cut. And that certainly will help the economy going forward.
Some of the other changes more recently are more questionable, but hopefully we’ll get back on track.
GWEN IFILL: Well, let’s take them one at a time. But first to Mr. Madrick, is this something over which the president has very little control like the professor just said?
JEFF MADRICK: No, I don’t believe that at all. Don’t tell John F. Kennedy that in the 1960s or LBJ or FDR or Woodrow Wilson.
There seems to be some mythology around that presidents can do nothing about economies. Well, that fits a certain kind of ideology–an ideology which suggests less government is the best government.
Well, sometimes that’s true. And I think we’ve made some needed reforms.
But the fact of the matter is, government has always been important to economic growth, in America back to the order 1800’s in fact integral, and government is needed again now. The president’s tax cut policy was entirely fortuitous, but remember, it was sold to the American public first as a political effort to beat Steve Forbes in the primaries and then because we had big surpluses in the economy was blooming. Now the president turns around and says, what luck we had a tax cut just in time. The people understand that this is not a presidential economic policy.
And the people don’t have confidence, I don’t think, it’s quite sad, it’s very days pointing that this administration doesn’t seem to be able to admit it made a mistake, that it has to go back. We all make mistakes, in fact that’s the side of courage, and I’d love to see some of that from the administration, I think so would the American people.
GWEN IFILL: Nancy Kimelman, what was the point of the meeting today in Waco; why was that useful?
NANCY KIMELMAN: Well, I think it was useful because frankly the economy has fallen flat.
We saw in the second quarter numbers that there really was very little growth if at all. And so the economy needs some stimulus at this point in time, or so it would seem. The question was whether the federal government, the administration and Congress should take that step, or whether it should be the Federal Reserve. But the economy is looking very sluggish here, the market is having a very definite affect on consumer confidence, on business confidence. It’s holding back consumers from spending. It’s holding back businesses from putting in new orders.
And so the economy looks to be very much at a crossing point, a turning point here. So the question is should the government or should the Fed really take that step and do what it can to avoid a far worse situation, as we begin the next year.
GWEN IFILL: Kim Wallace, what’s your answer to that question?
KIM WALLACE: My answer is really all of the above. Basically the president has been successful in convincing people that the tax cuts he pushed through last year has staved off a worse economy than we have now.
That may be true, but we have to recognize that the Fed cut rates eleven times in calendar ’01 and the Congress put out historic fiscal stimulus as well. We still have some time to go to judge whether or not that’s going to work. It seems that people are rushing to judgments about where we are in the economy before the results are in.
GWEN IFILL: What did the president need to hear today at Baylor [University] from the couple of hundred people he gathered?
KIM WALLACE: I think he needed to hear they they’ve he is still engaged and they have some trust in his economic problem and leadership overall. I think he needed to hear from other people as to which actions he could take as president to further the economy.
GWEN IFILL: And Professor Dunkelberg, what are those actions, what should they be?
WILLIAM DUNKELBERG: On the business side we certainly need to do something to help capital expenditures, lower taxes, increase profits, that heeds to higher capital spending. Of course having the economy pick up with private individual tax cuts will also help on the profit side. And that will help us get capital spending under way.
It’s going to take a little time because we spent five years building lots of capacity with lots of capital outlays. And now we have excess capacity. So we have to use a little of that up.
GWEN IFILL: Is that Mr. Madrick trying to get in? Mr. Madrick, is that you?
JEFF MADRICK: I would love to get in at this point if I may.
GWEN IFILL: Okay, go ahead.
JEFF MADRICK: I severely disagree. Tax cuts are not what we need. We’ve had our tax cuts. Let’s not forgets, this tax cut was totally accidental, as a stimulus to this economy. It’s worked, thank goodness, it came fortuitously, as others have said here, but it was accidental.
There are many better ways to stimulate an economy. And it needn’t be the federal government fiscally or the Federal Reserve monetarily by lowering interest rates. It can be both working together, and in fact historically, that’s when government policies have had the most potency.
In facts the other way around when we raise taxes in 1993, and the Fed reduced interest rates, finally there was some kind of credibility, there was some kind of bite. So I think we need to — both engines working, and there are far better stimuluses than tax cuts. We could extend unemployment insurance, people need it badly and they would spend it right away. That’s a very good example.
The state and local governments are hemorrhaging; they need some federal support. There are needs out there. We can solve some of those needs, help needy people and stimulate the economy. I don’t think we can sit around and wait. You can sit around and wait if you have a job, I guess.
GWEN IFILL: Nancy Kimelman, you mentioned the role of the Fed today. Of course the Fed decided not to act on interest rates, left them unchanged. Was that something that would be helpful to this economy as it stands right now, or is it a wash?
NANCY KIMELMAN: Well, I think it’s a wash at this point. But the Federal Reserve is in a very difficult position. It has lowered interest rates as was mentioned earlier eleven times last year, and interest rates were already at extremely low levels.
So the Fed only has a few more arrows left in its quiver, it can’t spend those unwisely. So the Fed really had no choice but to stand pat. But we talked about combining monetary as well as fiscal policy to really get the economy moving. It’s unclear to me how much more the Fed really can do.
Interest rates are at very low levels. The housing market is strong. Consumer spending on durables, as we’ve seen in the auto sector just recently, consumer spending for durables is up there. It’s not clear to me that lower interest rates are the solution.
And so really we’re at the point of having the federal government either expand its spending — whether it be for defense or national security or elsewhere — or for cutting taxes. But you know, there’s a limited tolerance in our nation now for running up a budget deficit. It’s okay to do so in an economic environment like we have. But to think about cutting taxes that are going to be very difficult to reverse down the road puts us in a situation in the long run when Bush stands to be reelected that could be very difficult for him.
So we have to remember that whatever policies we undertake, they’re to be under taken for the short run, but we have to live with them in the long run. And that makes President Bush’s position and the chairman of the Federal Reserve Alan Greenspan’s position a very difficult one.
GWEN IFILL: So Mr. Wallace, what is there left for the Bush administration to do to jump start this economy?
KIM WALLACE: Not just the administration but most policy makers, that’s to try to the real confidence. That’s a fact that’s missing not only in the markets but in the economy across the country.
People after the September 11 a tax of last year, the bear market which has affected two out of three households in the country for the first time we have that many people invested directly or incorrectly in the markets, and the ongoing economic softness, have really hit the psyche of the American investor and consumers, along with business investors.
We need to see some restoration of confidence and some of those people will come back into the economy, and over time some of the steps that have been taken on the fiscal and monetary side will begin to work.
GWEN IFILL: Does the president have the right people on his economic team to be the kind of cheer leaders you’re suggesting you need to build that confidence?
KIM WALLACE: The markets and many voters and surveys will tell you that they don’t. What looks to have happened is that the administration came in with a plan to run economic policy out of the White House, and to have a Treasury Department that was slightly less active than we have been accustomed to for the last 20 years or so in Washington — came a couple of crises, that have really forced the administration to become more flexible, they haven’t shown that deftness yet, in the last month I would argue they are getting around to getting reenergized and coming up with new ideas.
Some of those ideas will pay off over the long term, but basically the markets don’t believe right now in a lot of the decision making that goes on inside the Bush economic policy team.
GWEN IFILL: Let me just get back to Professor Dunkelberg on that question — whether there is confidence all across the board on this question of who is actually leading and formulating the president’s economic policy.
WILLIAM DUNKELBERG: Let me share some numbers with you.
Every month we ask a sample of our 600,000 member firms what they feel about the economic policies of the president and of Congress. And of course when we had a change in leadership at the presidential level, the percent giving an excellent or good rating for economic policies rose from 11 up to 55 percent — and then after the 9/11 event from 55 to 73 percent, a stunning vote of confidence on the behalf of small business owners. It has slid a bit since then, we’re down to around 58 percent.
But that’s still an exceptionally high approval rating. So small business owners who account for most of the job growth and over half the private sector GDP do think that the economic policies are philosophically correct and headed in the right direction.
GWEN IFILL: And that the economic spokesmen are also fundamentally the right people?
WILLIAM DUNKELBERG: Well, compared to whom. We’re not given a choice of people. The president comes in and he picks his team. If they don’t work too well he’ll have to make some changes, but we do have Greenspan and the full voting cadre at the Fed — the first since 1998. And we have a good staff at the Council of Economic Advisors, some very sharp people there. So I think overall we probably have a pretty good team in place.
GWEN IFILL: Mr. Madrick, you wanted to get in on the point about economic leadership?
JEFF MADRICK: I do. I think, if anybody thinks cheer leading is going to help, they are absolutely wrong. What will help are actions that work.
The president again today gave a pep talk, with almost no change in policy. In fact to quote him, he said we need focus and patience. In other words, wait it out. He’s ideologically committed to this kind of thing, to reduce government.
And in fact one of the TV stations, one of the cable TV stations, took a straw poll on their Web page, and 54 or 55 percent of those responding said they thought the president was doing a somewhat poor or very poor job. So you see there isn’t confidence, and there isn’t confidence for lack of cheer leading, my gosh, that’s all this president does. There’s confidence for lack of concrete action, lack of a sense the administration has a real plan. Lack of a sense they should be willing to admit there was a mistake in this tax plan, we need some stimulus now, but not big deficits down the road.
GWEN IFILL: Nancy Kimelman, one of the things which has happened which has been concrete is increased spending on the anti-terrorism campaign. Has that been good for the economy?
NANCY KIMELMAN: It has been good for the economy, but I think for when you take a look at the numbers, what you see is that the administration’s economic policy is largely an anti-terrorist and national security policy.
There hasn’t been — aside from the first tax cuts — there really hasn’t been in the last year a real effort to devise an economic strategy for the economy. But, you know, I think part what was we’re seeing in the economy right now with the loss of confidence among businesses and consumers, we can say that it’s related to Bush and we can say he might not have the right team of advisors and might not have the right cheer leaders on his staff, but a lot of it has to do with the market.
It’s really the market’s plunge that has destroyed business and consumer confidence. And the administration, like the rest of us, is something of a by-stander at this. If they could turn the market around, they’d be thrilled to could so. My suspicion is that the turnaround in the market, in the equity market is probably going to be far more important to restoring business and consumer confidence than initiatives announced by the president, whether today or tomorrow.
GWEN IFILL: And speaking of tomorrow, I just want to direct this question to Mr. Wallace.
There is, tomorrow is the deadline for CEOs to be able to file these forms at Wall Street that attest to the financial statement which is they are submitting and say they believe them to be true and signing their John Hancock next to that. Will that have an effect on consumer confidence, or is that another show?
KIM WALLACE: No, it should have an effect on consumer confidence, because 947 publicly traded companies are going to come forward and say that their books are clean, are at least they are as they have been stated as of today or tomorrow. That should be a confidence builder. I disagree a little bit with Jeff in that there’s been no action taken.
Clearly, the passage of the corporate accountability law that the president was slow to embrace but finally got around to embracing, that Congress had been pushing for the past eight months was a confidence builder. The market had one of its best days on that day. So if we can string together a few more of these confidence builders we may see that the macroeconomic fundamentals though soft now may be getting better and we’ll have confidence returning to the economy that could turn out to be a little bit better in six months, down the road.
GWEN IFILL: Okay, we’re going to have to leave it there for tonight. Thanks so much for joining us.