President Bush’s Economic Team
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RAY SUAREZ: Now, an assessment of the new economic team. We’re joined by John Castellani, President of the Business Roundtable, an association of chief executive officers of leading U.S. companies; Nell Minow, editor of the Corporate Library, a Web site devoted to corporate governance issues; and Ken Kies, managing director of the federal policy group of Clark/Bardes Consulting, where he provides tax policy advice to companies and trade associations. And Jeff Madrick, a contributing economics columnist for the New York Times and author of a new book, Why Economies Grow.
Ken Kies, last week when Paul O’Neil and Larry Lindsey left, it was said that the Bush administration wanted people who would be better spokesmen — better representatives, for their economic policies. Is this new team of Friedman, Donaldson and Snow what they need?
KEN KIES: I think it’s a great set of people. John Snow has got great relationships with the Congress. I think one of the weaknesses of Paul O’Neil was his ability to deal with the Congress wasn’t that strong.
The president has some really significant initiatives that the Congress is going to have to consider, stimulus bill, maybe tax reform after that. So Snow is a great choice for that. Friedman, obviously has great connections on Wall Street, and I think that is something that’s critical in terms of getting the economy and confidence.
And the choice for SEC couldn’t be better in terms of somebody that really has a great reputation and great experience, knows the markets. So I think the president has put together a really all-star team.
RAY SUAREZ: Jeff Madrick, what does the administration need from this new trio, and are they likely to get it?
JEFF MADRICK: Well, I think they’re probably not likely to get it because they perceive this as public relations issue. Indeed it’s an economic policy issue.Treasury Secretary O’Neil and Larry Lindsey were inept publicly. I think they did a bad job representing this administration.
But the issue is not merely public relations; the issue is policy, and I think it’s an attitude on the part of this administration. They resisted talking about the economy. They resisted talking about a stimulus package. They deflected attention from the economy. Now they’ve come out into the open. They’re conceding, hey, there is an economic problem. And Steve Friedman’s argument that the recession is over is not shared as yet by the National bureau of Economic Research.
By this time in an economy, we are creating new jobs… in an economic recession and recovery, we’re creating new jobs. We’re not creating any. The 6% unemployment rate understates the real unemployment in the economy because people are leaving the workforce. If they stayed in the workforce the way they used to, we’d have a 7% or a 7.5% unemployment rate.
So we’ve got an economic policy issue. Tax cuts are not… tax cuts and only tax cuts are not the right response for this kind of economic recession and the probability of slow growth, or maybe a reduction in GDP again. We need some direct stimulus there, we need temporary tax cuts that will be spent now. And what we’re getting is almost exactly the opposite policy to what we need, long-term tax cuts mostly for the well off who will not spend at creating long-term deficits.
These two gentleman… these three gentlemen face a serious problem. It’s not clear to me, though they are more competent, that they’ll be able to deal with it.
RAY SUAREZ: John Castellani, maybe you can respond to Jeff Madrick and also give us your overview of this new economic team.
JOHN CASTELLANI: Well, I agree with Ken; it’s a very solid team; it’s an experienced team. And I think there is something else that is particularly important. It’s a team that both knows how to communicate and I think communication is important and a team that understands the political dynamic.
I mean John Snow has a tremendous political acumen. All three of them have worked in the political circles, so they understand the dynamic that’s going to bear on these issues.
The CEO’s of the Business Roundtable are concerned about the economic outlook. We have our own survey of our 150 members, which doesn’t point to a very good economy for 2003: Stagnant investment, declining employment, and growth that is very much below what we think this economy can achieve without any danger of inflation. We called for a large package, something that would have a significant impact on the economy early on next year, and this is what the president is working on.
Now, our idea is to address exactly what’s been said, and that is to get a large amount of money to the most number of people, the fastest means possible, people who will spend it. And that’s why we’ve called for a withholding tax holiday on the first $10,000 of income.
The second part of it, though, is important, and that is that we accelerate the tax cuts that have been already enacted, bring them forward to 2003, so there’s some permanence.
And the third element that we’re advocating is to provide relief for investors who own shares on the taxation of the dividends that are paid on those shares on individual investors because part of what’s depressing this economy has been the depression in equity prices, and everyone looking at their 401K’s, their IRA’s and their savings and saying, “I can’t go out and spend because I’ve lost a lot of value.
So I think it’s a challenge for this team, but I think it is a team that is very capable of dealing with it. And as we know, the administration is considering right now coming forward with a package that will speed up the economic recovery.
RAY SUAREZ: Mel Minow, how will investors and the people who visit your Web site, regard this new team?
NELL MINOW: Well, I represent the other side. I represent the supply side of the capital markets, and I don’t think that they’re as excited about these appointments as the people on Wall Street are.
If you’re looking to restore investor confidence, you have got to have an economic team in place that has a record of promoting accountability to investors, and we don’t see that here. We have people coming straight out of the business community, and spouting the same kind of rhetoric.
I’m not too worried about the taxation of dividends of people in their 401K’s and their IRA’s because you don’t tax the dividends that are in tax-protected accounts like those. I’m a little bit more worried about how we’re going to pursue some of the corporate scandals of 2002 and how we’re going to prevent further corporate scandals and I want to see people in place who are really committed to some real reform.
RAY SUAREZ: Well, the appointment of William Donaldson was hailed like here’s a guy who really knows this world. Is that the kind of signal that you were looking for from the Bush administration?
NELL MINOW: I’m feeling somewhere between cautious optimism and outright skepticism right now. I comfort myself that the first chairman of the SEC Joe Kennedy was accused of being the fox guarding the hens and the person who appointed him, FDR, said it takes a chief to catch a thief.
I don’t think Donaldson is that kind of guy. I think he is very much in the business community, of the business community and on behalf of the business community.
RAY SUAREZ: Now, John Castellani, do CEO’s feel that they have a friend where they didn’t before? Paul O’Neil was the head of ALCOA, and at the front end, when he first began with the administration, this was talked about as someone who would be very friendly to that world and understand the problems of people like your members.
JOHN CASTELLANI: Well, I think in John Snow clearly and in the other appointees, Donaldson and Friedman, you’ve got experienced business leaders. And so I think there’s a level of comfort with that. But there are a couple of other things that Nell touched on that I think are very important in addition to that.
And that is part of this, part of what needs to be done is to restore confidence not only in the capital markets but also in the corporate governance system. In John Snow you have somebody who has been very active in advocating governance reform. He was the co-chair of the Conference Board’s blue ribbon commission that came out with very, very cutting-edge and aggressive reform proposals. He was very active in developing the Business Roundtable’s principles of corporate governance and he’s been a leading spokesman for it. That is part of it.
And what Nell was talking about on the dividends, let me be very clear, that is not to provide stimulus for the people who receive those dividends into their 401K’s. That’s not taxable.
But we think by not taxing dividends, you’ll put upward pressure on equities markets because it’ll more highly value those equities that do pay dividends and that in turn will relieve some of the distress that people are feeling because of the contraction that they’ve seen in their 401K’s and their IRA’s.
So good businesspeople I think will have strong leadership from them and are they a friend? Well, they’re somebody who understands business, all three of them understand business and that’s vital to this.
RAY SUAREZ: Jeff Madrick, both today and during the past week when these new people were coming onboard, a lot has been said about stimulus. You mentioned it in your opening remarks. But are you all talking about the same thing? Pump-priming, money going into the economy?
JEFF MADRICK: No, I don’t think we are, Ray. And the nature of even this conversation disturbs me a little bit because it’s been so… the agenda has been so well established. We only talk about tax cuts. We talk about strong leadership. There’s a lot of cheerleading here.
What we want to see is some action. What will make people invest again, indeed what will make business invest again is more business, more customers. Tax cuts I think in this kind of economic recession and very slow recovery, if a recovery at all, are not going to work in large part because it’s an investment recession.
There was too much investment in the late 1990s, too much exuberance and a lot of false hopes for a lot of reasons we’re talking about. What we need and what has worked in the past, is also some spending.
We should immediately extend unemployment benefits. Two million are running out of unemployment benefits by the end of this month. We should… a million people… I’m sorry. We should be getting money to the state and local governments who are going to start cutting back significantly on education and health care. And then maybe we can start talking about tax cuts.
But the idea– and I think it’s almost breathtaking to me that we’re only talking about tax cuts when we had a boom in the late 1990s that occurred after we had two major increases, tax increases under the first President Bush and under President Clinton. It’s almost as if we’re in a public relations vacuum. Public relations is not what we need right now. We need some serious action. We need business again.
RAY SUAREZ: Ken Kies?
KEN KIES: Well, I think public relations actually is part of this story. Giving people confidence is what makes them go out and spend on Christmas presents, it’s what makes them feel good about making new investments and hiring new people.
So I think part of the job here is to send a message that the administration believes that the economy needs attention, that they’re going to give it serious attention. Tax cuts are part of it. I don’t think that’s the only part of it for the administration.
The Justice Department has been aggressive in indicting corporate wrongdoers. And I think that’s a part of the effort to show that they’re serious about getting corporate governance back to where it belongs. So the PR is part of this story because it’s what makes people feel good about where they’re going, what they’re doing, how they’re spending. So we can’t downplay the importance of sending a strong message out there that the economy should get going.
We had 4% growth in the third quarter. If we get a good retail season in the fourth quarter, we may see some decent growth. So I wouldn’t say it’s all doom and gloom here. And I think this team is a great team to do the job for the president.
RAY SUAREZ: Well, to the extent that PR is, as you suggest, a part of this, what does it tell us that there was some backchannel stuff going on around Steven Friedman’s appointment, a lot of Republicans expressing their own displeasure with it?
KEN KIES: Republicans are always good at kind of having their fights that should be in the back room in the front room. There was some disagreement about whether he was aggressive or not.
I think he clearly has communicated with the president. He’s a good choice. He’s going to defend the president’s policies. The notion that they’re going to hire somebody into the White House who’s going to immediately start undercutting the president’s position I think is foolish.
So these little skirmishes occur from time to time. It’s healthy. It shows that people have different views. But I don’t think there’s any doubt but that this team is on the right track with the president.
RAY SUAREZ: Well, Jeff Madrick, Nell, suggested that there was too much investment at the end of the ’90s, as a representative of the people who buy stock and not necessarily urban issue it, what’s that… what’s the right relationship between too much, not enough? How do you know when enough is enough?
NELL MINOW: Well, there was too much investment in the wrong companies for sure. I mean we went through sort of a bubble period where people would buy stock because their hairdresser’s second husband suggested it. People were not doing any kind of fundamental research anymore.
There was a lot of talk about a new paradigm. There’s only one paradigm, which is that you look at cash flows and you decide what the expected future returns are going to be and you invest on that basis. I’m glad that people are more cautious now. I think that investor caution is probably a better promoter of a stronger economy than any of these other things that we’re talking about. And I hope they will continue to be cautious.
RAY SUAREZ: So what has to happen short term, and what will these new appointees be involved with that will create that balance?
NELL MINOW: Well, I’m hoping for some very rigorous confirmation hearings so that we can ask Donaldson and Snow directly exactly what their commitment is going to be to improving corporate governance.
The SEC has not moved yet on the New York Stock Exchange’s excellent proposals for reform. We want to find out what Mr. Donaldson thinks about that what he thinks about the proposal that’s currently being considered to require disclosure of proxy policies by institutional investors.
So I think there are a number of bellwether issues that we will be able to ask them about that will tell us right away whether these are the right guys for the job or not.
RAY SUAREZ: What do you want to see in those confirmation hearings?
JOHN CASTELLANI: Well, the three things that we’re talking about and that’s first a good discussion of where these men stand in terms of how they view the priorities, both for the economy. I think it’s very important, as Nell said, that we continue to implement the things that were enacted in Sarbanes-Oxley.
The new listing standards for the New York Stock Exchange and for the NASDAQ and the other initiatives that the SEC has undertaken; it’s absolutely important that we follow through and follow through smartly and quickly to restore investor confidence. That part of it I’m confident the SEC will, with this kind of leadership.
On the economic side, the issue is what to do, how do we get consumer demand up so that we can create an economy that’s growing fast enough to create jobs? Right now, we’re not creating jobs, and that’s the real tragedy here. Yes, we have overcapacity. We’ve got sufficient capacity in manufacturing and financial services, certainly in telecommunications to meet a lot more demand.
And what is the administration going to do to help stimulate the demand for that capacity is something that’s going to be on everybody’s mind.
RAY SUAREZ: Guests, we’ll stop it there. Thanks a lot for being with us.