Wall Street Week with Louis Rukeyser; 3029; The Bush Economy

Every week for more than 30 years America's most widely watched and trusted source of economic and financial advice Wall Street Week With Louis Rukeyser is made possible by you. We can get these formated watered digitised to push a zero for. The second one. Lasting relationships. For professional services the answer reads the people love to look into it. By A.G. Edwards committed professionals providing a full range of financial services and investment advice. A.G. Edwards trusted advice exceptional service. By Oppenheimer Funds. Where a long term approach to investing has helped put financial security in the hands of millions of Americans. Oppenheimer Funds the right way to invest. By the Kauffman fund. A small company aggressive growth

fund. And by contributions to your PBS station from viewers like you. Thank you. Produce Friday January 19th. Tonight special guests are Alan Blinder professor of economics Princeton University. Steve Forbes president and editor in chief Forbes and Edward Hyman chairman ISI Group Incorporated. Good evening I'm Louis Rukeyser. This is of Wall Street Week. Welcome back. Well wouldn't you know it. Here it is the weekend when the spotlight should be shining on America's new president. But Bill Clinton once again made sure that we'd all be talking about him. What an incredible surprise like the quintessential product of the 1960s that he always has been and who is lingering ramifications will indelibly mark his place in American history. Our

first baby boomer president seem to have taken as the pervasive theme of his farewell address. Hell no I won't go. In a vintage two part performance that represented one less reprise of his now familiar dual national role as Doctor Clinton and Mr Hyde he appeared first as president and then as miscreant. Last night. Commentary in prime time television to give himself a report card on his job record as president. He modestly found it to be absolutely a plus. While characteristically taking this little note of the plainly deteriorating economy he was now passing on to George W. Bush as he did at the outset of his presidency to the already improving economy. He was then inheriting from Bush's father the departing chief executive there my thereby made it totally certain that while he will surely enter the history books as one of the most skillful politicians of the past

century he is unlikely to be getting many job offers for work as an objective economic analyst. And then today to reinforce the continuing paradox that was a messy moment or two in which he finally admitted without showing up personally of course that oh yes he had lied under oath paid a $25000 fine and agreed not even to attempt to practice law again for the next five years. What are we to make of this remarkable and divisive personality who is continually stirred sets deeply conflicting emotions in the American psyche and particularly of his economic and financial legacy. Was he truly the instigator of record prosperity Federal Budget Responsibility and stock market euphoria or was he just astonishingly lucky in this time even at both ends. And did all this occur with little or no relevance to his actual economic policies or even despite them. And what can we really expect now from his

successor and from what will probably all too soon given the fabled shortness of the American memory span quickly become known not as the Bill Clinton legacy but as the George W. Bush economy. Tonight we're going to zero in on those fascinating questions in the company of three eminent Americans. All of them undeniable economic experts. A qualification that they will confirm by disagreeing entirely with one another. One worked for Bill Clinton another tried to run against him and the third sat by in non partisan fashion trying to figure out what it all really meant for investors. Tonight's the night we try to settle this. Once and for all. So wishes lots of luck. Meanwhile back in the financial markets there were paradoxes of another kind. As the year began most conventional Wall Street observers operating as usual with their ever flawless rearview mirrors. Concluded that 2001 would begin as

2008 ended with old fashioned value stocks the winners and those terrible chancy technology stocks out of favor for at least the next millennium. You betcha. While the broader market is still struggling to get out of its own way waiting to hear how much first aid can be expected at the end of the month from the Federal Reserve the technology sector is showing a stunning amount of fire in the embers. Nasdaq which flamed evermore brilliantly for five years before having cold water poured on it in 2000 is already up by more than 12 percent this year and nearly twice that from the frightening lows it reached less than three weeks ago. While the market remained hyper jittery and almost sadistic Lee ready to punish any company that disappointed any securities analyst. It was a growing sense that yes maybe ultra pessimism about the economy in general and the beaten down technology leaders in particular really and truly had at last created some

wonderful buying opportunities for the strong of heart. We shall see. But for the moment at least that bell we rang on this program just seven nights ago to test the old Wall Street cliche that they don't ring a bell when the bottom is not looking like the worst time Tintern Abbey elation of the decade. But now let's check out just how hopefully the markets are looking toward an economic pick up in the second half of this year. And as the Dow Jones Industrial Average indicates investors this week took in stride even continuing signs of deeper economic weakness on the theory that these plus repeated evidence that the alleged inflation threat has proved itself to be a phantom menace. Will encourage the Fed to cut interest rates more sharply than the consensus previously thought. For the week the Dow added sixty two points to close at ten thousand five hundred eighty seven. But the real excitement was further down the list in the tech powered Nasdaq with not only put together its first back to back weekly

gains since September but is now ahead by more than 15 percent in that comeback fortnight alone. Well the market's new hints of new optimism. Bail out our long overly upbeat elves. They certainly hope so but neutral has continued to be the vote that wins haloes as it has been in fully 36 of the past 44 weeks for the Dow. Over our most recent three month testing period the Dow has risen just over three and a half percent. And it takes at least a 5 percent rise to vindicate the bulls. Since December 8th we have made the little fellows forecast Nasdaq as well since its performance has diverge so much from the Dow's in recent years and three months from that date. We'll start seeing whether there bullishness there is justified long term government bond yields again Ed lower this week. But ironically the bond ghouls are no longer rejoicing quite so much a downbeat news about manufacturers and consumers. The trouble is they reckon that it's now so obvious that a

change Fed policy plus tax cuts from the new administration may reignite the economy and increase the competition from stocks. Meanwhile oil one of the few flaws in the disinflation point surge back over $32 a barrel as global chilling froze the northeast and the dollar rebounded against the euro but surrendered a bit of its recent gain against the end. And if you've ever been bothered by jet lag the solution may lie in your liver. Assuming that is that your body functions pretty much like a rat's tail of American Japanese and Norwegian researchers found that if you change the feeding schedule of laboratory rats a day or two in advance their livers would adjust to new time zones just fine. So is life truly worth living. It depends on the liver. With me tonight to give us their views on what to expect from the second Bush economy or three old friends of this program

Steve Forbes twice campaigned unsuccessfully for the Republican presidential nomination and is now back at his old stand and that of his father and grandfather as president and editor in chief of Forbes magazine. He is tonight making his sixth appearance as my guest on this program. Alan Blinder has been active on the other side politically advising both Bill Clinton and Al Gore and serving as Clinton's choice for vice chairman of the Federal Reserve and is now back in his old stead as a Princeton professor of economics. Well taking on a new private role with plumbing Torii financial in Washington this is his fifth appearance as my guest. And Ed Heinemann chairman of the advisory and money management firm ISI Group has outlasted a string of presidents having been voted Wall Street's number one economist for a remarkable 21 years straight. He is making his 12th appearance on this program. Gentlemen let me begin by asking each of you is George W. Bush inheriting a recession.

Steve I'm afraid he's inheriting a very shaky economy. I think at best you're going to get flat Kaname in the first half of this year. And I think the reason one of the reasons Lou that the market is showing signs of life again is the prospect of a major tax cut including a cut in capital gains but the economy is in bad shape. I want to come back and ask you about taxes but first let me hear from him as whether he agrees that we're facing a recession where we're facing the possibility of a recession for the first time in 10 years that's actually a realistic possibility. I would say the best guess is we're going to skirt around a recession and not actually go negative maybe for a quarter an inventory swing can always put you negative for a quarter. So I would guess no. But there's no doubt that we're getting a bumpy patch and it's the next. The last three months in the next six months are not going to look like the last four years for sure. Ed what do you think you've been thinking the recession was not unlikely for many months now and the you know it's clearly commies weakened a lot and

there's a chance it could fool everybody Lou and turn up a lot quicker than people expect. But I'm looking for now sort of a second round negative to appear like layoffs or cutting capital spending and I think the issue is going to be. That it's week and they'll be doubts about whether I think at some point they're going to be doubts about whether it's going to turn up in a second half of the year. My guess is that it does turn up. But I think the consensus is a little too sure of that. They're sort of saying I know it's weak now but I'm sure will turn up one of the positives the president cited last night was that unemployment remains at 4 percent. That's usually a lagging indicator of the economy. And it looks as though that's going to change a lot. How much do you think is going to change. You know we've had the weekly measure of unemployment claims has moved up 25 or 30 percent and the layoffs

have increased significantly in the past couple of months. So I think what's in the pipeline now. I would get the unemployment rate to four and a half percent already and if the economy stays weak for another six months maybe up to five. Steve you mentioned tax cuts. It's certainly a move you've been associated with for a number of years. Many economists are now contending that that is not too critical in terms of this year's events because it takes so long for tax cuts to take effect on the economy. How do you respond to that. Well I think if we you know they're going to get a major tax cuts including capital gains. I think people are going to be much less pessimistic and perhaps not cut back on capital spending as much as they would have done before consumers might ease up a little bit. So this has a very real psychological effect and if you want a recovery in the second half you better start getting something in the pipeline right now. I know what you want because you told the country you wanted a 17 percent flat tax.

What do you think we're going to get this year. Actually I think we're going to get a lot more than Washington thinks. I think we will get a real cut across the board in income tax rates. I think he'll phase out the death tax I think will get liberalization of Roth IRAs. But the big one is going to be I think Congress is going to propose and he'll sign a cut major cut in the capital gains tax. And another thing that has to be done which I think you'd go along with the President Bush is a moratorium extending the moratorium on special Internet taxes that expires this October. If that's not renewed watch out for the Nasdaq. Before I turn to Allen who I think may have a somewhat different view on tax cuts let me ask you the question that the Clinton people have always used to rebut the case for tax cuts which is we're paying down the national debt it's a historic historic achievement. Why should we reverse that trend by cutting taxes. Because if you want to reduce the national debt long term you need a prosperous economy.

Washington As you know today has taken more percent of your personal income people's personal incomes in a new time since World War 2. Reduce those rates and you will get those surpluses in the future. But if you don't reduce that tax burden and the Federal Reserve doesn't significantly ease those surpluses will eventually disappear like water in the desert. And you agree with all that doing some of it not entirely. I would like to remind you and Stephen everybody that early in the Clinton administration we raise the upper bracket top bracket rate. Now nobody claimed that raising the upper bracket rate is the way to prosperity. But it doesn't look like it hurt all that much. I say did you pay that rate when you were in office. You know what I mean it all fell dramatically I didn't have to pay it and you know what you have in fact suggestion that maybe some tax cuts are not appropriate this year. What would you favor and what would you expect. Well I think you could easily see a package that has a significant reduction if not an abolition of what's euphemistically called the marriage tax.

I think you can have significant movement probably not abolition of the estate tax this. People on both sides of the aisle of favor that. I think there's probably some room on the rates. If the package is changed to be not quite so tilted to the upper 1 percent as Mr. Bush's campaign proposal and as Steve said I think there's a lot of steam gathering in Washington behind a liberalization of retirement accounts of some sot IRAs and other things like that. I'm not here to speak for the top 1 percent who are and I could be the most popular people in America whatever anyone ever says but the highest rate went up more than 50 percent in real terms in three years at the start of this past decade if you go from the 28 percent to the real rate which was somewhere in the 40s probably with all the changes. Would you favor no reduction in that top rate. No I think if you're going to give an across the board cut you might make a small reduction in that

rate but so I will take to 39. Yeah something like that I wouldn't be troubled by because I mean after all these are the folks and of course when I went left government I got back into that group fortunately. But these are the folks that have done so blended in the last decade really fabulously well not only in the stock market but certainly. In the stock market. It's not exactly a needy group now if you really believe that has fantastic incentive effects that you could really boost the national growth rate by doing that. I'd be in favor of it but I don't see that the evidence supports that. And you don't expect it to happen in a dramatic way and I don't know that any dramatic way but I think I think there's a good chance that something on the top rate will be done I mean the president elect more really wants to do it and make it done. Ed what would you like what do you expect. I guess I would focus on. The dimensions of it. You know the first line is that this was a trillion six over a decade. And

that's much more modest than the regen tax cuts or the Kennedy tax cuts. And I have the feeling that we're going to go through a period this spring where people will say that's not that much per year and given some of the other problems in the economy it's not enough to make the economy turn up in the first and the second have this year. So my feeling is that we're going to see tax cuts but I don't think they'll be quite as early as say Memorial Day. I think they'll come in the second half of the year and they're going to be retroactive to January 1st or so. They they might be but they'll be passed later in the year and they'll be the uncertainty and they won't be that significant. I think given the state of the economy. Let's see if we meet you on this one. I mentioned only half facetiously that the president given himself an A-plus for his economic performance. I want each of you Steve. I'm in a generous mood I'd give a D-plus what saved him was the Republicans. First two

years after but the Republicans got him almost to a good passing grade. What policies in particular do you think elevated him from abject failure in your eyes. Well I think the Republicans prevented him from trying another tax increase from going on a binge on spending curbing the regulatory apparatus a little bit. He does deserve high marks he left Greenspan in place that was a positive thing he adopted Republican policies and free trade that was positive as well. Would you give him somewhat high grade. Yeah I think I'd start with the assessment just where Steve left off and give him an A-minus. The handling of the Fed so to speak which is to say leave the Fed alone was superb and people ought to remember that's not what past presidents have done it was really quite extraordinary about sounds easy and of course there's the deficit reduction I really do think that the 1993 budget act was a turning point in our fiscal history and it's easy now we look back and say Oh well everybody wants to reduce the deficit. In 1992 it

was thought to be anathema to touch that this was root canal economics you remember and he really changed the entire. Political attitude towards debt reduction and then there's the promotion of trade that Steve mentioned. What would it have taken to move them from an A-minus to an A-plus in your book. Well A-plus I don't give a plus is very very easily I think little not in your class. I think you will. And I think you would have done something on health care better than we did it I mean I was in the administration then and this was not our. It was not our shining hour. I think the welfare reform is frankly yet to prove itself. We get to see how it goes in poor economic times that great could be elevated if in fact it passes through good economic times bad economic times well. Ed what's your grade. I give him a high grade. The the things that I think would be higher than the minus and I mean the A's

you know the things that I think were a mistake. Where are the tax increases and the big government medical programs. And after that it's very difficult to know if he was just lucky with Republican ideas or actually did it. But the system in general was really free market oriented. The thing that I think is the best part of it was that spending was restrained. You know for a long period of time there. And then you also had freer freer trade and deregulation on top of that. I think Greenspan move and I give Ruben a lot of credit. Mr. Greenspan leaves me the logical next question. I mean hear from each of you. As to the extent of the blame for today's economy if any that should append to the Federal Reserve Steve I'm afraid I'd give the major

share portion to it. I think this idea that prosperity causes inflation. The chaff to have a soft landing as long as you keep the dollar steady in value. Let the economy take care of itself. This slowdown was unnecessary and he bears major responsibility for that now and you were his vice chairman what you reaction. I think you have to give him give some to the Fed. I mean this economy is presumably slowing down because of the stock market and the Fed had something to do with that because of the interest rate hikes. And of course that was the Fed and because of the oil energy. Which is because I don't think we want. The blame on the Fed I also think part of the post election period the thirty five days we went through I think didn't do any good for consumer spending and I sure wouldn't blame that on the Fed. Do you think the Fed not only waited too long but went too high last spring. Well they're almost the same thing. I mean it could either be in that you never went that high or that you started backing off sooner I think those to come more or less the same thing.

And there have been figures out recently Lou that show wages have accelerated quite a bit. That weren't there before they come from maybe three and a half to over four so I'd say in retrospect there was some science of inflation picking up and you know frankly we we asked too much. I mean to slow the economy and expect to be able to do it you know with that precision. The feds over over over done it but so far it's not that big a mistake but it definitely and overshot and overshoot so far. We're in the homestretch now so let me ask a question if you could answer in a sentence or two we will get out on time which is what's the most important thing George W. Bush should be doing now in economic policy. He's doing it. Cutting taxes. He has direct impact on that. I think he'll get it. It will be a good one. I think maintaining the fiscal discipline so we keep with this mix of easier monetary policy and tighter fiscal policy that has done us so well in the 1990s and specifically that

you wouldn't have the push for tax cuts but you will moderate that I would moderate exactly what to what extent would divide it. Oh on the 10 year number I would sure like to see it under a trillion maybe 800 billion or something like that. The biggest challenge is to keep government spending under control. You know there's a movement to have taxes cut and all the other policies that have worked will be continued. But the challenge with the big surpluses and tax cuts. In places to keep government spending restraint I think that's going to be the biggest challenge for him. That's the challenge facing all of our recent presidents and they have met with varied success. And there we do have to stop I want to thank my guests the four of them by tonight I'm going to join me tonight. Hope you'll be back again next week when we'll look at whether the television the movie businesses will be truly entertaining for investors in the next 12 months. My guest Jessica Reif Cohen is the country's top analyst of the businesses that try to keep us smiling. And we'll check out what's hot and what's not for viewers and investors alike meanwhile has been Wall Street Week. I'm Louis

Rukeyser. Good night. Wall Street Week With Louis Rukeyser is produced in association with Kaiser television incorporated by Maryland Public Television made possible by the way to. Helping the company build our economy rebuild. For a business services the answer is the people of Detroit going to. Buy A.G. Edwards for providing a full range of personalized financial retirement and estate planning. A.G. Edwards trusted advice exceptional service. By Oppenheimer Funds. Every year millions of Americans place their financial futures in my hands of one mutual fund company. Oppenheimer Funds the right way to invest.

By the Kauffman fund. A small company aggressive growth fund. And by contributions to your PBS station from viewers like you. Thank you. For a printed transcript of this program. Send $5 to transcripts Wall Street Week With Louis Rukeyser Maryland Public Television Owings Mills Maryland 2 1 1 1 7. This is PBS.