Wall Street Week with Louis Rukeyser; 1913; Hail to the Chief...Economist

Oh. Yes. Your. Wall Street Week With Louis Rukeyser. Is made possible by the financial support of viewers like you and by Prudential Securities the investment firm with rough sort of resources and market wise thinking in the business of making money. Produce. Friday September 29 our path. Analysts are

Deborah Allen Laszlo Bernie and Carter Randall. Tonight's special guest is Michael Jay Boskin chairman Council of Economic Advisers. Good evening I'm Louis Rukeyser This is Wall Street Week. Welcome back. Well folks I don't care what those nasty cynics say I continue to believe deep in my heart that it is possible for the United States Congress every once in a while when you least expect it to do something good. Besides a journey and that is and this was a week when Congress in the nick of time set out to prove it by the time they had returned to the party circuit this weekend in fact they had managed to give us the least taxing week of 1989. First the House of Representatives voted to repeal the paperwork nightmare Congress had created three years ago in an effort to force companies to prove that their employee fringe benefits were not skewed in

favor of higher salaried workers. The result had been such a ludicrously complicated burden on small businesses that many said they would stop even or point benefits such as health insurance thus throwing one more burden on the federal taxpayer. Well OK said the house. Maybe that wasn't too bright of us. Then again ignoring the protests of the Democratic leadership that the status quo was totally hunky dorey fully a quarter of the Democrats in the House joined an impressive bipartisan majority voting to give President Bush the reduction he had asked for in the capital gains tax. The bill passed by the House would cut the present maximum rate on capital gains from 33 percent to nineteen point six percent until the end of 1991 thereby encouraging people to take capital gains and pay the tax and then revert to 28 percent with newly acquired investments indexed for inflation. Precisely why I thought was such a good idea to cut the capital gains tax. They didn't make the

reduction permanent can be explained only in terms of academic estimates that this was the way to maximize revenue. Those academic estimates have of course never been right in the past. But who's counting. Anyhow to give Congress something else to argue about in two years. The sight of Dan Rostenkowski Tom Foley and Dick Gephardt jumping around threatening to raise some other tax if anyone dared to cut this one. And Dean in the end roundly ignored led some partisans prematurely to assume that this was just another issue of differing party philosophies. But then that week send the tables were turned. It was the Democrats calling for an investment tax break but the Republican White House was opposing President Bush's Treasury Secretary Nicholas Brady said it would be in his words too expensive to reinstate tax deductible IRAs for all taxpayers. And golly gee who would have believed from the press coverage out of Washington earlier this year that the

real competition in economic policy this fall would be over which party can come up with the best plan to reduce taxes on savings and investment. Not only is this a competition in which the nation and the taxpayers can't lose but it's almost enough to restore a man's faith in the entire legislative process. This particular rivalry continue and accelerate. We tonight will get an exclusive insight into what's likely to happen next in economic policy when I talk with the president's own chief economic advisor. But first let's see what kind of a party they were having this past week in Wall Street. And as the Dow Jones Industrial Average indicates the continued effort by Western governments including our own to force down the value of the dollar caused damage to our currency our bombs and our stocks. But as the effort again seem to be running out of steam and as the economy continue to chug ahead traders started to regain confidence and the Dow closed up 11 points at twenty six ninety two

point eighty two. Also advancing for the second straight week with the broader market indexes with the American exchange and over-the-counter composites leading the way to all time highs. In the all time dollar rooms though are Elves whose technical market index has been registering a bearish minus three for six weeks. Precious metals were mixed though gold crept to a six week high in both the dollar and bonds were victims of the intergovernmental warfare against the greenback. And if you want to do business in all those countries that are selling our dollars including this one your best bet might be to learn Spanish. That was the view of executives asked in a survey to name the most important foreign language for a successful business career in the next 20 years. Fully 44 percent said Spanish with Japanese next to 33 percent in third place with only 8 percent support was the one time number one diplomatic and international

language French that I'm quite optimistic. Quite a read on how would you describe the language of Wall Street these days. Makes Lou it's been floundering around for several weeks now. I think this twenty seven hundred level in the Dow is sort of a magic level if you take people back to 1987 again we'll go through it. We're going on the new highs. Corporate earnings are doing very well overall. But I think investors should be very careful about what kinds of stocks they own because I think some of the highly cyclical stocks the consumer durable companies may be in for some very rough times. Auto producer steel produces that kind of thing. Yes I think there's no question that there are economic cycle is over at least for the time being. One of the big news is the news this week was that IBM acknowledged that it was going to have much lower earnings than had been predicted. IBM got hit but the market managed to go ahead what do you make of that. It was tough. I haven't seen nobody seen yet the final figures from IBM but

I assume that some foreign sea currency translations of earnings are part of the reason for that but the other part is they've gone from. Selling to leasing. They still like the company. I love the company long term I think it is the great blue chip company but it certainly looks as if its earnings are going to be so good for a while. Deborah Allan you have been a long term fan of. People buying bonds and with their interest rates would go lower in the long term. What do you think of the short term now. Well I think we have another very good chance for rates to decline again by the end of the year. And specifically because of the reason you were mentioning earlier about the currency markets all of the major central banks through a lot of money trying to lower the dollar and with marginal success. The only thing left for them to do if they're serious about this is for the foreign central banks to raise their interest rates and for the Fed to cut rates again. And I think it would have to be something pretty aggressive at least a half a point or would have little impact because the dollar's

been so strong and able to rebound from this intervention. When you say cutting rates half a point you're talking about short term rates. Yes that would be short term rates they would cut the discount rate and then the treasury bill rates would follow almost immediately. So that's where the most action would come and it's interesting that the peak in the yield curve right now is at one year pretty short also. So in that sense the short term rates have the most to gain but I feel bond yields would follow down. In other words what you're saying is that with maximum interest you can get is when you're out. That's exactly right. If you want to get your money for a longer period of us that's right but of course you make more capital gains when interest rates come down the further out you are so the longer term bond you have you make more. So even if rates come down slightly less at the long end you can still make more money there. Brainy What do you make of what is going on. Well in this market has fallen a very nice historical pattern over the last 70 years. July and August have been among the strongest months of the year and September has actually been the weakest month of the year. You're seeing it again.

If the pattern falls you're going to see sort of a higher prices but nothing dramatic until possibly some December it would be simpler. So you think the market for around for the fall. I think it will do a little bit better but as of today we have the ninth best year in history and you know I think that no one would have expected this year to be you know in top 10. So I think we've got a pretty good year. What's your view on bonds and interest rates. Well I really don't claim to have a whole lot of knowledge about that I work with a gentleman Kell friend for many years and I let him talk about that and he was always right with. I think just in his record I think that I will defer to the expert on that. Along with her is shrugging your shoulders and why are you finding chicken futures now. Anyhow this is the point in the program when we usually pause for a round of viewer questions but since we all want to know what's going on at the White House we'll be using that time tonight for more questions to my guest. Next week though we'll get back to what's almost normal around here. So if you have any remaining questions about

love life or money. Some of us here at Wall Street Week Owings Mills Maryland 2 1 1 1 7. That's Wall Street Week. All we know is Mills Maryland 2 1 1 1 7. Now before we meet tonight's special guest let's take a look at the real record of capital gains taxation in America and see why even many who would not personally benefit from a reduction in this tax might still wind up regarding that as a capital idea. Here's a longterm look at capital gains taxation in America as it indicates even during World War Two in the immediate post-war years when federal taxes on personal income ranged as high as 94 percent. The maximum rate on capital gains never rose above 26 percent where it stood in 1954. It held that 25 percent from 1955 to 1969. But then edged up in stages to 35 percent and for some taxpayers caught in the interplay of other provisions of the complicated Revenue Code it was actually as high as forty nine and an eight percent.

The Creeping increases were reversed in 1978 down to 28 percent and again in 1981 when tax cuts for all brought the maximum capital gains rate down to 20 percent. But Congress since then has gone the other way raising the maximum rate to 28 percent in 1997 and as high as 33 percent since then. A number that when combined with other provisions of the code actually can result in the steepest capital gains tax in American history as high as forty nine and a half percent. But why shouldn't the rich pay more and many people ask well even if you assume incorrectly that all those who take capital gains are rich. The answer seems to be that the way to make them pay more is to reduce not raise the rate after the 978 capital gains cut for example. Government revenues from capital gains increased glowingly in the next two years and they saw it even more dramatically after the rate came down to 20 percent. The American Council for capital formation which compiles these statistics hasn't yet come up with the numbers

for the years since 1986. But the reasons for this apparent contradiction. Lower rates more revenue are easy to understand when rates are high. Many people avoid taking capital gains when rates are reduced. They cash in and pay the federal ticket. Is it true as opponents contend that this is just a short term phenomenon. Or is it the best route to the long term health of the American economy. For some thoughts on that let's go over now and meet tonight special guest Michael J Boston. Michael welcome to see you here. Pleased to be here. Nice to see you again. Nice to see you. Michael Boston is an economic advisory service with only one client the president of the United States is Dr. buskins job as chairman of the Council of Economic Advisors to provide George Bush with the guidance he needs to choose sensible economic policies. And in so doing Dr. Boston has restored a significant measure of prestige to a

job that Ronald Reagan once wanted to do away with. That the boss can hold three degrees from the University of California. He is currently on leave as an economics professor at Stanford. Michael you won't get an argument around here about the desirability of lowering the tax on capital gains but why in the world would you agree to a proposal that would change all the rules one more time two years from now. Well first of all you have to understand the dynamics of passing tax legislation. It must start in the House of Representatives. Let's get out of the Ways and Means Committee out of the house before it can get to the Senate and then the final bill will be written in conference. We're partway there we have to finish up reconciliation in the house. There will be some other things besides capital gains that it will hopefully go over the Senate. So we tried to get a proposal that we thought would be good would be good for the economy good for America. It would not bust the budget would actually help some on revenues. And we had our own proposal. We worked very hard on that proposal. A compromise was worked out. The so-called plan we think

it's a good plan it's the best plan available now and we worked very hard in Congress with Congress with people of both parties. There were 64 Democrats who voted for it. We're delighted with the outcome. We would like to see as we go over the Senate we would like to work with the Senate and again with the conferees in getting the best capital gains tax cut we can. Do I infer from what you've said that you will be working to make this cup permanent. Well there were there are some people who will like to do that we're going to work hard with Congress to do what's right. I wouldn't want to prejudge exactly what we did. Well George Bush want to make a permanent they want to make it 15 percent not nineteen point six percent. And I don't know why in the world would he want to make it a short term two year proposal. Well if the alternative was not to be able to do anything or not to be able to keep the process going and I think it was important that we work very hard for the best proposal we had on the table and that's what we did. And I don't know but I do get it. I don't expect you get an argument with Nick Brady because I want you to keep this job next week. But why is this administration fighting the

restoration of tax deductions for IRAs. We're not really fighting it we're very concerned about the budget deficit we want to make sure that what we do to encourage personal saving or to make sure that we remove impediments to personal saving lives doesn't just wind up increasing the budget deficit. Secretary Brady testified today and he made that very clear we're not interested in something that will just raise the budget deficit in order to encourage saving. We've established a task force in the administration led by Treasury and a Council of Economic Advisors and OMB and we're examining some alternatives we're trying to do that in a careful clear way and we'll be coming up with some ideas and I can assure you that any that we come up with will be will be certain not to raise the budget deficit. Well the deficit certainly a concern but you're a good economist you're a good student of capital formation if the IRA is encouraged and increase in savings in America when they eventually help the deficit problem well they would certainly help in the longer run to encourage investment and economic growth. But the traditional type of viral people take the tax deduction upfront

I would wind up losing some revenue in the short run the estimates for the proposal that Senator Benson has made are up to 15 billion dollars through 1904 and we just can't afford that right now we want to make sure that we have a sensible proposal that doesn't worsen the budget deficit. Capital gains proposal we have will be good for the economy will stimulate saving it will stimulate investment it will stimulate entrepreneurial activity be good for jobs increase the GNP and it will raise some revenue it will not lose revenue. So we can't say that about IRAs Unfortunately the current proposal would lose some revenue over the next several years and we're anxious to avoid that. If you're so concerned with the deficit that you would not favor otherwise desirable legislation. Why don't you do more to cut spending. We're working very hard to do that we're working very hard right now we're working very hard with Congress. We've made a variety of hosel he had a bipartisan budget accord. We've worked very hard implemented as you know as we have been getting down to the wire here. There are bits and pieces that have frayed a bit at the edges but we're working very hard with all the relevant committees to

try to to do that the president has made it clear while he would take the continuing resolution this time and we have one until October 25th that he wants a good government wants the appropriations bills done he wants to make sure. That we keep spending under control. We would hope to avoid sequester if we do not. We would meet we'd like to make sure that we use this this instrument to keep spending under control. It's one of the requirements your job seems to be almost part of the job description is that you get in a fight with the Federal Reserve and then deny that it's an argument a few weeks ago it was said that you were pushing the Fed to lower rates more rapidly and then you said no you weren't. Could you describe your view of Fed policy yourself so we know what it really is. Well sure you know one of the interesting things about coming to Washington is that you wind up having people make more than a mountain out of much less than a mole hill. I had made a statement that was describing the economy and was phrasing in general the course of economic policy was reporting how well the

economy was doing that inflation appeared to be under control the concerns earlier in the year that inflation was going to accelerate out of control. You would have been mis placed that was primary a temporary increase due to energy prices. The economy appears to be sustaining its growth and I just made it clear that our basic concern was to maximize the real growth of the economy making sure that we controlled inflation. It is our understanding that that is the Fed's goal that certainly what they have. They have stated they want the maximal sustainable growth consistent with price stability. So we have similar goals. We have discussions all the time in private we have a lot of confidence in the people of the Federal Reserve. We believe that they're looking at the same data we are and they'll take appropriate action as the data warrant and as the signs in the economy warrant. Right now we believe the economy is doing pretty well rather remarkably as a matter of fact. As you know we're in the second longest expansion in the entire history of United States. Let me try and put that another way. For example in English would you favor right now for the reduction in the discount rate.

I'm not going to preach the Federal Reserve right now it's kind of the oldest game in town to try to do this sort of wouldn't you say though if it it it wouldn't be that we believe that the economy can sustain its growth that it's important to sustain its growth but we also have to make sure we keep inflation under control we believe that can be done and inflation can be reduced while the economy sustains its growth our own outlook calls for in our forecast which thus far has been very accurate calls for gradual reduction in inflation consistent with the economy sustain growth and then in a couple of quarters in the middle or end of next year rebounding to its long run. How far out are you willing to predict that we will not have a recession. Well some people have this notion Lou that an economy soar like a transportation system. You know we've heard the economy the expansions erratic gas and we're going to steam. And we heard was going to a crash landing or a soft landing. With all due respect to my good friend the Secretary of Transportation Sam Skinner I'm getting tired of these analogies. There is no reason that we have to have recession any time soon. All of the statistical evidence

suggests that the probability of a downturn is independent of the length of an expansion we've had downturns after short medium and long expansions this didn't run out of gas or steam when it superseded the second longest post-war peacetime expansion. It can continue for some time to come. Now no one can guarantee we're not going to have a recession for any period of time I think it's unlikely to happen anytime soon. In a story and looking back in the distant future today will undoubtedly have observed some downturns out there but. We don't see any policy mistake or serious imbalance in the economy or severe external shock as likely at the moment. But there are no guarantees in this business forecasting is tough you know that from all the people you've spoken to forecasting. We have economists we have people who are perfect Let me bring in some of them with some of the Coromandel. Michael I want to get back to interest rates for just a second. I think it can be said really that interest rates are going up not down and I'm talking about the real cost of money. Inflation is abating and yet Interest rates remain relatively level at least over lists.

A few weeks or months. And isn't that something that we must address if the economy's going to continue to grow real. The real cost of money. I agree the real cost of capital is an important issue that's one of the reasons we favor so strongly reducing the capital gains tax. We're one of the few countries that taxes capital gains as ordinary income and we have a competitive disadvantage we need to lower the cost of capital secretary Brady has made it quite clear. He's also very interested in exploring ways to reduce the tax bias against equity par and wants to avoid some of these proposals to limit interest of UCT ability because that would raise the cost of capital to American business in an increasingly competitive international marketplace. So that's a serious concern we have this working group that's studying us. But it's important understand that while the inflation rate has been kind of blipping up or down in the first part of the year it rose rapidly and then it's fallen to to almost nil the last couple of months. It's a board understand that a lot of that's been the unusual behavior of energy prices. Energy prices rose about 70 percent late last

year with crude oil prices and that worked its way kind of like a pig through the python into the Producer Price Index and consumer prices and the other indexes. Recently energy prices have actually been falling and that's dragging the index down. If we remove the special volatile effects of energy which economists tend to call the core inflation rate inflation has declined a little bit but it's still a little over 4 percent and it's been a averaging around the quarter that we're sort of we go down. Mike this administration seems a little bit confused on trade policy. Most of the members seem to be that are getting most attention seem to be rather protectionist. They seem to have adopted the view especially regarding Japan that markets just don't work and we can't use free trade in the longer you're a bit of a lone wolf arguing for free trade policies. Do you think this administration will continue to impose import restraints in tit for tat retaliation or can we look for resurgence of free trade. Well actually Deborah I wouldn't agree with your characterization of the administration first of all we're

all in agreement with the president that the goal of U.S. policy is to help lead the world a freer and fair trade to reduce trade distortions where they occur our primary focus is your wire around of the General Agreement on Tariffs and Trade Ambassador Hills is rich framework tax to try to bring 15 areas that are agriculture intellectual property and others are outside the rule based mechanisms of the Get inside the gat. We are very very concerned that we make sure that we have a level playing field but we continued United States commitment to try to liberalize trade and open markets including our own. We're going to continue to do that. It's a matter of fact if you look at what we've actually done we cut the length of the steel agreement in half. We liberalize with the quotas and so on so I think it's kind of a misperception out there I think we more or less agree on trade policy. Going back to your previous career what would you advise a student to go into becoming a stock more good guru Economist Group. Which is he's well.

I don't know which is easier. I think they both take a lot of hard work. I don't know how easy it is to become a guru and I think Gurus come and go. I would just encourage people to take courses that really teach them something about how the economy and financial markets work. And I think that's the best advice I can can give them I think they'll be able to utilize that knowledge in a variety of ways regardless of which questions they go into. Michael we're really out of time. How often do you see the present. Often sometimes several times in a day sometimes putting us travel schedule not for a while but we communicate daily either in writing or by phone or in person. Sometimes those meetings are with my colleagues like Nick Brady and Dick Darman and John Sununu and Roger Porter sometimes alone. Very next time you see him tell me is welcome here any time you want to come. Shirley thanks very much Michael Baskin. Thanks to the panel. I hope you'll be back with us again next week. Then my guess will be a man who has made a modern success of an old fashioned virtue. The search for value. Is David Dreman. And he's going to tell us where that search for value is leading them now and how it might if we let

people do something of value for you and yours. We would value is always your presence. Meanwhile this event was Fleet Week. And with that tonight. Wall St. Louis Rukeyser has been made possible by the financial support of viewers like you and by Prudential Bache security. The investment firm with a rock solid resources and market wise thinking in the business of making money for a printed transcript of this program sent a $5 to transcript. Wall Street Week With Louis Rukeyser Owens Mills Maryland 2 1 1 1 7. That's $5 to transgress Last Week With Louis Rukeyser. Maryland 2 1 1 1 7. 1 Street Week With Louis Rukeyser transcripts are also available to subscribers of the Dow Jones news retrieval service.

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