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Gwen Ifill discusses the state of the economy with Kenneth Kies, a co-managing partner at Price Waterhouse Coopers; Robert Kuttner, co-editor of The American Prospect, a liberal and progressive bi-weekly magazine; and Maureen Allyn, chief economist at Zurich Skudder Investments, a financial management company.
The State of the Union may be strong, but what of the state of the economy? And what, if anything, should the government be doing about it? We analyze the President's answers to those questions now, with Kenneth Kies, a co-managing partner at Price-Waterhouse-Coopers and the former chief of staff of the Congressional Joint Tax Committee; Robert Kuttner, co-editor of The American Prospect, a liberal and progressive biweekly magazine; and Maureen Allyn, chief economist at Zurich Scudder Investments, a financial management company.
Kenneth Kies as a jumpstart, if that's the speech was intended to do last night, as a jumpstart to the economy, how did it succeed?
KENNETH KIES, Price-Waterhouse-Coopers:
I think it succeeded pretty well and that's mainly because the President has the facts on his side. If we look at the past 12 months, the number of people unemployed jumped from 5.7 million to 8.3. We lost 1.8 million jobs in the United States. 800,000 of those were lost in the last quarter in year. We lost 1.3 million manufacturing jobs. So when we look at the 0.2% growth rate that they just announced, no one should get too excited and feel good about that. That it was largely a consequence of government spending. So the economy is clearly not sound, and I think the President is sending that message and the public opinion polls are with him. 54% of the people agree economic recovery is the most important job he's got.
Mr. Kuttner, what do you say to that? Do you think that the economy is basically not strong – what the President outlined tonight – will do something about that?
ROBERT KUTTNER, The American Prospect:
I think the economy is pretty feeble, but I'm not all clear the President is going to do something about it. What he is calling economic stimulus is mostly retroactive tax cuts for corporations. Corporations invest money when they see customers; they don't invest money because of tax incentives – almost any economist will tell you that. The stimulus ought to be more on the spending side, less on the tax cut side. So I think when the President talks a good game, when he talks about stimulus, his actual program will not do much to stimulate the economy. I also think there's a kind of Enron drag in the sense that you don't know how many other time bombs are out there in the form of weak corporate balance sheets. And unemployment is projected to go to at least 6 ½ percent this year, so we do need a stimulus package, but I don't think it's the one that the President is proposing.
I want to get back to that question of the Enron drag, but first I want to ask Maureen Allyn about something else we learned today, which was that the Fed decided to hold the line on interest rate cuts. As part of statement the statement they put out they said the outlook for economic recovery has become more promising. Is that a significant thing for the Fed to say?
MAUREEN ALLYN, Zurich Scudder Investments:
Yes, I think it is. When we're talking about a stimulus program, what we ought to look at is we have had massive stimulus and what it has impacted the economy enormously. What we shouldn't forget is any program enacted, fiscal or monetary, takes a long time to work. The Fed started to stimulate on January 3 last year, and Bush came in with a tax cut before most people realized the tax cut was going to be in a recession or have any problems. He was laughed at. They have done enormous stimulus. It's helped the economy. Do we need more? Probably not.
Are you saying these 11 rate cuts in a row finally are paying off?
Absolutely, and just at the time you think they would. I mean, it takes a year at least. Let's give cheers. The economy is feeble right now, but given what it has taken a stock market crash, a lot of things, September 11, it's doing amazingly well.
Ken Kies, it's true that the economy is feeble, but if the rate cuts have worked, why do we need, why do Americans need a stimulus bill still?
Well, I think both of our guests are saying what is true, which is the economy is feeble. Losing 800,000 jobs in the last quarter is not a sign that the economy is doing well. The President's proposal is a balance package. He would increase unemployment benefits, which is important because people are going to start losing unemployment benefits, particularly those who became unemployed on 9/11, by March. You with the President has a component package of items to put money in the hands of corporations. And that's where the employment is. 69% of all jobs are by corporations in the United States. They pay 75% of all wages. So the President pumping some money into the corporate side is a good thing. It will help stave off layoffs. It will help stave off delaying R&D, research and development; it's a positive part of package.
So you're saying if a stimulus package would to pass, it should be top down?
It should come from both ends. We should deal with the problem of unemployed by increasing unemployment benefits, and that creates consumption, and we should focus on the job creating side, which is corporations. That's where jobs come from.
How about that Mr. Kuttner, should it be top down, bottom up, or any stimulus package at all?
Well, I think we do need a stimulus package; I think it should be bottom up. The problem with the theory of corporations creating jobs in a recession because you give them tax cuts, tax cuts are not going to make a corporation come out and build another factory if that corporation doesn't go out and see customers. The other problem with the Bush tax program enacted last June, the Bush tax program, almost all of that takes effect after 2004, almost all of it takes effect on the upper brackets. I don't know how could you say a tax cut that takes effect two years from now is going to do any darn do good during the recession. It's fine to run deficits in a recession, but the sensible thing is to rescind the tax cuts and then run a moderate deficit now to get the economy out of the ditch that it's in this year.
That's what Congress should not be doing. What kind of legislative fixes should Congress be seeking?
I think Congress should be increasing public works outlays. I would like to see Congress do emergency sharing with the states. The states are running a budget shortfall this year of 50 to 60 billion dollars and because the states cannot run deficits, that means $50 to $60 billion is going to be taken out of stream of state programs and that means it's going to be taken directly out of the stream of state programs. It would be smart if Congress took some of that money years from now and spend that on revenue sharing for the states this year.
Maureen Allyn, as Bob Kuttner points out correctly, states cannot run deficits, but the federal government certainly can. Should this new deficit spending be factored into any kind of idea of how a recovery will occur and whether it will take root?
A lot of deficit spending is automatic. It's appropriate that we're spending homeland security; it's appropriate that we're spending defense, and those are stimulative. There's already a lot of automatic stabilizers. A lot of those wealthy people won't be paying many taxes because they won't have much income because of stock market here, if you call that a tax break. I think what the government really needs to do is look after the things it can do well, which is defense and homeland security. Taxes had crept up a lot. Bush's tax cut office to address some of those prior tax increases. But let's face it, a stimulus package that's enacted now won't get working until 2003 at the earliest, and by then, the way the economy is looking, I don't think we're going to need it.
May I differ with that?
If Congress passed a $60 billion revenue sharing package that would take effect instantly, because the states would not have to do $60 billion spending cuts. So it is possible to design a stimulus package that takes effect this week.
You can't pass it this week.
That's a separate question.
I want to move on and pick up on a point that Maureen Allyn made, which is that there's a lot of money being spent on defense and homeland defense, $30 million a day on the war, as the President said last night. Whose job is it to hold down spending as the President also said that the Congress should be doing?
I think it's both the job of Congress and the President. Together they have to make the best judgment for the American people about what are the demands we face as a nation. These are tough questions. But it's going to have to be them jointly. None of those will be easy to deal with, but I think it's wrong to think that an economic stimulus package couldn't take effect immediately. If it was enacted by the Easter recess, it could be effective by January 1 of this year. That means it would immediately impact the economy and could immediately impact the creation of jobs and help people who are unemployed. I think we really need to focus on what we're doing now.
While we're talking about deficit spending, let's me just run down some of the things the President called for last night without necessarily specifying how they would be paid for: Extended unemployment benefits, head start, HMO and Medicare reform, prescription drug benefits for seniors and doubling the budget for the Peace Corps and homeland defense. How do you do all that in this type of economy?
The President is going to run a deficit and they have made a judgment that running a deficit in this economy is probably a good thing. So it can be done. We're going have to borrow, but borrowing to get our economy going is a good term, long term investment. Mr. Kuttner said we can take to the tax cuts for 2004 and spend them now. I don't know how we do that. Those are in 2004. What we need to do now is focus on what we can actually do to get the economy going, because if we get the GDP growth rate up revenues will go up. Federal revenues as a percent of GDP right now are projected to be at the highest levels in the history country, almost 20%. Taxes in the United States are high, even with the tax cut occurred last spring.
Mr. Kuttner, your response?
Well, the way you take money that was going to be given away in 2004 and spend it now is do what the President did. You look at the ten-year projection of surplus money and deficit money. You give away less of it in taxes two years from now and you spend more of it now to get the economy out of recession. It's perfectly okay to run a deficit during recession. Both parties used to believe that. One of the most bizarre turns of events in the past few years is that the Democrats have become the party that believe almost as a matter of religious faith, some of them, that you should never run a deficit. It used to be that everybody felt correctly that it was appropriate to run a deficit during a recession. It's odd that's it's the Republicans now who are carrying that banner.
Maureen Allyn, I don't want to stray too far from a point that Bob Kuttner brought up earlier, which is about the Enron effect. Is there an Enron effect, especially effecting investor confidence?
Absolutely there is. I work in a financial market and we see an enormous skittishness out there. Any time an executive leaves unexpectedly or one probes through a little bit of an off balance sheet organization, I mean people are running scared: And I think that's going to be a little bit harder to cure because there have been real excesses in the financial markets that always happens in a time of exuberance. And that's going to take a while to clean up, so I don't think we'll have an exuberant stock market to bail us out any time soon.
I think there's a minor Enron effect. I think Enron is a unique situation – a terrible tragedy. I hope the one thing Congress doesn't do is overreact to it and enact a bunch of legislation to deal with a problem that doesn't really exist.
How abut that, Mr. Kuttner?
I don't think it's a unique situation. I don't think it's a tragedy, I think it's an example of deliberate malfeasance. It's an example of conservatives lobbying to prevent the Securities & Exchange Commission from doing its job. And as these regulations forcing corporations to keep honest books have been loosened, some of the biggest names in the American economy — Citicorps — Andersen, Citigroup are implicated in this and I think investors correctly perceive that you are going to see more Enrons and that needs to be reformed big time. In the meantime, investors are going to be skittish, and that's going to be one more drag on the economy.
The President said pretty bluntly last night, we're at war and we're in recession. If these two are indeed linked, how long will this recession last Mr. Kuttner?
I think this will be a slightly worse than usual recession. You have three factors that aren't typical. You have September 11, you have the dot-com meltdown in general, the unwinding of all that excessive exuberance of the 1990s, and on top of it, you have Enron, which leads investors to be more skeptical than usual about corporate balance sheets. So I think you take those three things together. It's probably be a slightly worse than usual recession if we're lucky and if we have the public policies to get us out of it.
I think I agree with Mr. Kuttner – the key is what are the right policies – and I think what the President has laid out is the right balance. We need to increase unemployment benefits, but we have to focus on the job creating side. People want their unemployment benefits increased, but they want their jobs back. That's why we have to focus effort on the job side of equation.
Ms. Allyn, how long?
I think the recession is very close to over. Again, I'm looking at the massive stimulus we have had and the massive fiscal stimulus we have already had and we're coming to a stabilization and probably beginning growth this month or next, if we didn't begin it last year. But whether it will be a fast recovery, I think it's going to feel very uncomfortable just like it did coming out of '90/'91.
All right. Ms. Allyn, Mr. Kuttner, and Mr. Kies, thank you all for joining us.
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