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Economic Stimulus

October 2, 2001 at 12:00 AM EST
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JIM LEHRER: Answers to that and other questions now from Felix Rohatyn, president of Rohatyn Associates, a financial firm, he served as ambassador to France in the Clinton administration and was managing director of Lazard Freres, an investment banking firm; and Michael Boskin, a senior fellow at the Hoover Institution, he was the chairman of the White House Council of Economic Advisers in the first Bush Administration; and John Shoven, director of the Institute For Economic Policy Research at Stanford University.

Mr. Rohatyn, how would you answer that question: Are we in a whole new ballgame, do you think?

FELIX ROHATYN: Well, I think we’re certainly in something that none of us has lived through before. Now I hasten to add that I’m not an economist and so that my views are sort of less eclectic.

But I think I’d like to go back a little bit and look at the world and where we were before September 11 — when our economy was already very weak, where we had a collapse in capital spending, where we had vaporized trillions of dollars in the collapse of the dot-coms and the telecommunications industry, and where I think six or seven interest-rate reductions by the Fed in the first six months of this year had just changed absolutely nothing in the downward trend of the economy.

At the same time, the Congress had voted a big tax cut which was back loaded and which also didn’t have any real effect on what was happening. And at the same time our big trading partners, the Europeans and the Japanese, were also in deep difficulty.

So I believe that interest rate cuts may work over time in normal circumstances. I have to look at the record of what’s happened up to now, and the record is that they haven’t been effective. Things are not getting better; things are getting worse. On September 11, a huge shock to the economy and to our social system was added on top of this.

New York City is facing, in addition to the loss of life we’ve had, we’ve had the loss of 110,000 jobs since September 11; and to the fear for wealth and to the fear for jobs has now been added the fear of the unknown created by the international situation. I just don’t believe that we can sit here and wait for added data about what’s happening. We know what’s happening, and it’s all very bad. I think we need action.

We need leadership from the president, as strong as the leadership he has given on international affairs, and we should have a program that is simple, that is clean, that is easy to understand, and that will create employment and that is long term and not simply piecemeal.

JIM LEHRER: We’ll come back to some of that in a moment. But I want to go around. Mr. Boskin, what about the interest rate cuts today? Do you agree with Mr. Rohatyn that it probably isn’t going to have any effect at all on the potential of recession or not?

MICHAEL BOSKIN: No, I don’t agree with that. I do agree that the economy was flat at best prior to the terrorist attacks and it was dealt a blow and we are likely in a recession as we speak.

I do believe that generally there’s a fairly long lag between the Federal Reserve starting to cut interest rates and that actually effecting the economy. That generally takes nine months, even longer, so that the likely impact of the earlier Fed cuts was going to show up late this year and early next year in any event. Now that’s probably been pushed off a bit because of the additional downward pressure from the consumer staying home, not flying, the greater uncertainties that CEO’s are facing in reducing business spending even more in some instances.

So I do believe that there is a case to be made for fiscal policy if it can be carefully, sensibly designed and passed quickly to complement monetary policy. But I believe that the Fed has acted responsibly. I do believe its actions will eventually help as it has in previous recessions. Every recession is different and has different causes, a different timetable. And there is some urgency to getting on with things on the fiscal policy side if we are going to do something, which I think we should.

JIM LEHRER: Mr. Shoven, what’s your reading of the likely impact of today’s Fed decision?

JOHN SHOVEN: Well, I think the decision will lead to economic expansion. I think the total of the nine cuts that have occurred in 2001 are going to strengthen the economy in the second half of 2002. I actually think…

I agree with Michael that we’re in a recession. I think it’s going to be a fairly sharp but quite a short recession. I think we want to customize our response accordingly. I don’t think the outlook is that bad for the long term.

We need to have a stimulus package, which is quick-acting and temporary. I don’t think we want to ruin the long-term fiscal balance of the economy to fight a problem, which I think is going to last perhaps nine months.

JIM LEHRER: So, Mr. Shoven, you do not agree with Mr. Rohatyn’s view of the future on this or the seriousness of the economic situation?

JOHN SHOVEN: Probably not. I mean I do think we’re into a recession but I see the economy recovering in the second half of 2002.

I don’t think we want to try to offset a one-year slowdown with policies of spending and tax cuts over 10 or 20 years. We need temporary measures to help the economy, not long-term — create long-term deficits that we can’t deal with.

An analogy that I use is the following: Say you consider a household whose budget’s very tight. A member of the household needs immediate surgery. You spend whatever it takes. But once the person has recovered, you go back to worrying about your budget.

My view is that the U.S. Government has a lot of budgetary problems including the entitlement programs and the like, and that we don’t want to just throw everything out to offset… In this environment, we want to deal with the crisis but we want to keep our eye on the long term as well.

JIM LEHRER: Mr. Boskin, do you believe there’s an answer, for instance, some of your Republican colleagues, Dick Armey, for instance, the House Republican leader today called for $150 billion in tax cuts as a way in addition to other ways, as a way to help the economy out of this. Do you favor that approach?

MICHAEL BOSKIN: Well I favor the approach, probably not quite that amount and perhaps I haven’t seen today’s proposal by Congressman Armey, but I do believe that we need to have action and action soon and it has to follow several principles.

One, it’s something that has to be enacted quickly. It’s something that has to get money into the economy through consumers and business spending, and perhaps some small additional government spending — very quickly in the next couple of quarters to be much of an anti-cyclical and anti-recession device to get us out of this. I agree with Professor Shovin that we should not be doing something that causes serious problems two, five, ten years down the road. We need something that will stimulate things now.

We need to be thinking about things that can be implemented very quickly — moving up the previously passed tax cuts, perhaps something on the payroll tax, business incentives on the business tax, accelerated depreciation or an investment credit. The additional spending that has been called for may well be desirable for other purposes and certainly we have humanitarian needs on the spending side and we have some responsibilities for the costs of the emergencies that were created through that… That we’re doing through FEMA and so on.

However, it’s important to understand that when people are calling for massive increases in construction spending and the like, that those are unlikely to get into the economy very quickly. And whatever the merits of those things are, those should be debated about what we ought to be doing over the long term. That’s not something — the typical spend rate out of a government construction project in the first year is 20 percent or less. So there’s really little there that can actually help stimulate the economy right now.

JIM LEHRER: All right. Let’s… That brings us back to you, Mr. Rohatyn, you have written and said very forcefully that you believe this is a time when we should, in fact, do some major spending in order to stimulate the economy. Make your case, please, sir.

FELIX ROHATYN: Well, I think we are 20 years behind in our infrastructure requirements, and I believe that if there ever was a time to begin dealing with this and at the same time making the country more productive and safer, it is to bring forward a lot of the infrastructure investment that we haven’t been doing.

And it seems to me that we could have a program of $50 billion a year or so that is stretched out over five to ten years that would take care of a lot of our needs for schools, for bridges, for new airports, for transportation systems and that would improve the productivity of the country. But I also think that we have to bring something forward quickly so that I would very much support bringing the Bush tax cut forward, eliminating some of the extraneous things in it, like the estate tax elimination and have a ten-year tax reduction program of $75 billion a year, starting January 1, next year.

So you would have a combination of immediate relief through taxes by just modifying a tax cut that’s been passed already and at the same time create a couple of million jobs a year with a construction program. I know it takes time, but, you know, I keep hearing that interest rate cuts take time, and I see them because they’re not doing anything. So that I would believe that this would be a perfectly reasonable combination. And I do not subscribe to the notion that we should just do something that is temporary, that’s got lots of bells and whistles attached to it, and that in the long run will just sort of fritter away.

JIM LEHRER: Mr. Shoven, he’s talking about you.

JOHN SHOVEN: Well, there are a lot of things that we can do quickly. For instance, we can extend the length of time people can collect unemployment insurance.

We can accelerate some of the necessary defense spending, manufacture more jet fighters or more unmanned spy planes or whatever we need to do. We can accelerate some of that spending.

On the tax side I think we want to do something that acts quickly and temporary, something like for the business side, a temporary investment tax credit. Over the next 12 months, companies can get a 10 percent tax credit for all new equipment and motor vehicles that we purchase.

On the household side again it could be something temporary like a partial credit for payroll taxes paid. I think we want something that acts very quick and is very temporary so we don’t ruin the long-run budget balance that we need to deal with the long- term problems of Social Security, Medicare. Those problems are still there. And we don’t want to ruin the efforts of the last decade over this crisis.

JIM LEHRER: Mr. Rohatyn, what about those specific things that Mr. Shoven just mentioned — would you buy those?

FELIX ROHATYN: I think if you went today to Boeing and said, “look we’re going to pass an investment tax credit but we’re only going to keep it there for a year or two but now is the time for you to build a new factory,” I think they would laugh you out of Seattle.

I don’t think there is a need for temporary things. I think there is a need for a long-term economic policy that people can have confidence in. You know, of course it’s good. Everybody worries about long- term interest rates. John Maynard Keynes said that in the long run we’re all dead. I think we have to deal with the crisis. I think we have to deal with what’s becoming a confidence crisis that I think the president has to get ahead of. And I just don’t agree, but as I said before I’m an economist. I’m just sort of a businessperson. But it just doesn’t seem to me that this is logical.

JIM LEHRER: Mr. Boskin, is it not logical, I mean when you look to the confidence question first and then if you want to build confidence in the American people in what’s going to happen on the economy, how do you do it? How would you do it as contrasted with the way Mr. Rohatyn is suggesting?

MICHAEL BOSKIN: Well, let’s leave aside the issue of the merits of dealing with infrastructure spending over the next 20 years, I’m for building bridges and roads that pass rigorous cost-benefit tests, but I don’t think this is the time to be trying to get that passed in the next 90 days to buoy a very shaky economy over the next nine to twelve months. I think that doesn’t make any sense at all. There are some things that can be accelerated. They ought to be things we would have done anyway that have already passed those rigorous cost-benefit tests.

I think the thing that we need to be focused on is getting income into people’s hands. I think that their confidence will reflect their incomes and their projections about the future. We are going to see some continued deterioration in the economy for another quarter or two almost certainly.

JIM LEHRER: But do you….

MICHAEL BOSKIN: We need to be able to combat that with the expectation that people are going to have, declines in their incomes or their prospects cushioned. Therefore I do think we need a program. I think it was properly diagnosed as being of the order of 1 per cent of GDP or more – round in any event.

We have a $10 trillion economy. So numbers that sound large in the abstract, spend $5 billion, et cetera, are a pittance for the overall economy. Those things should be evaluated based on their individual merit. To get money into the overall economy we need to be talking about — about $100 billion in total.

JIM LEHRER: Do you believe that the specifics aside that the time has come for President Bush to do something dramatic and large in the economic area to instill confidence in the American people, post September 11?

MICHAEL BOSKIN: Well I think it’s time for the president and the Congress to get together on economic stimulus package. I think it was right for them not to do something the day after the attack, to wait and try to deal with some national security concerns and to try to assess the damage a little more accurately. And with that in mind, I think it’s now time for them to be developing that package over the next week or two to try to get something passed soon.

Things that can have an immediate… immediately get resources into people’s and businesses’ hands and try to improve the incentives with some lower rates, with a faster depreciation or an investment credit or something of that sort, so that we get some of the epicenter of the problems in business spending and freeing consumer spending turned around at this stage or at least stabilized.

So I view this as an insurance policy and wise insurance policy to take out at this point. I think President Bush and the Federal Reserve have demonstrated good leadership throughout.

First of all we’re fortunate that the previously passed tax cut showed up when it did. It’s helping a little. It wasn’t very large, the short- run part of the long-run Bush tax cut. It showed up and helped a little bit. The Federal Reserve has been cutting interest considerably for some time. They may well do more later on. But also the day after the attack they invested massive liquidity in the system to make sure we did not have a massive payments collapse.

JIM LEHRER: We have to leave it there, gentlemen, thank you very much.