Wall Street Week with Louis Rukeyser; 2930; The 21st Century Economy

Yeah. It's 30th year as America's most widely watched and trusted source of economic and financial advice Wall Street Week With Louis Rukeyser is made possible by Deloitte and Touche. A company isn't a building. And a business isn't a location. But a firm has its people. For professional services. The answer is the people of Deloitte and Touche. By the financial consultants of A.G. Edwards. Committed to making investors comfortable with their investments. With their futures. A.G. Edwards be comfortable 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 white way to invest.

By the Kaufman. Small Company aggressive growth fund. And by contributions to your PBS station from viewers like you. Thank you. Produced Friday January 21st. Tonight special guests are Alan Blinder professor of economics Princeton University and Hyman chairman ISI Group Incorporated. And Lawrence Lindsey Arthur F. BURNS chair in economics American Enterprise Institute. Good evening I'm Louis Rukeyser This is Wall Street Week. Welcome back. It was that noted financial adviser Plato who first warned us that the life which is an examined is not worth living. Some people slow to adapt to the modern technology of the era complained that this was all

Greek to them. But others got the point. And tonight taking the philosopher one step further we ask the question is the UN examined economy worth loving. Most Americans delighting in what will become next month the longest economic expansion since Plato got a passing grade from Socrates have shown more interest in enjoying the recovery and the unprecedented stock market is produced. Then analyze it. Was it really the result of Ronald Reagan's anti-government revolution. How much of it can be tied to Bill Clinton's pro government restoration. Or is all that just partisan nonsense while the genuine heroes were developing software in their garages or mulling the once deadly subject of monetary policy at the Federal Reserve. Tonight we're going to get an exclusive insight into all those questions as well as a significant preview of the likely 2000 presidential election campaign by talking with top advisers to

George W. Bush and Al Gore. Indeed the two advisors now widely considered the most likely successors to Alan Greenspan assuming they will actually ever be a successor sometime in the next millennium. Plus for a private sector viewpoint the reigning champion of Wall Street economists. And the beauty of these guys is that despite their credentials as professional economists they manage somewhere along the way to learn to speak simple and understandable English. The talent they will probably have to unlearn if any of them actually does become the next chairman of the Fed. So catch them while they're hot. As for how the stock market did this week the only way to answer that question is with another question. Which stock market. Every day of this holiday shortened week the Dow Jones Industrial Average fresh from registering a nifty four week ascent went down down down dropping close to 500 points in its fourth biggest weekly point drop ever.

But it was what me worry for the less traditional indexes Nasdaq the emblem for high tech rose every one of those days the Dow was sinking set in a string of records along the way. So did the Amex whose heavy representation of energy companies benefited from a hike in the price of oil to the highest levels since the eve of the Gulf War in December 1990. And so for that matter did the Russell 2000 the benchmark for Wall Street's long neglected but now increasingly fashionable small companies. In short it was a week in which only the blue chips were feeling blue. In the busiest trading week in human history. I can't vouch for the dinosaurs. Most stock buyers manage to shrug off both the soaring oil price which they figured was nowhere near the economic problem that used to be and the bond market so nervous that it pushed long term yields near a three year high. With the stock guys taking

comfort in the fact that at least the 30 year Treasury yield close the week below six and three quarters percent. Indeed the most conspicuous losers this week were all those instant analysts who had claimed earlier this month that high flying tech had had it and that good old sturdy cyclical industrial giants were going to be the flavor of choice throughout 2008. Gosh guys there may be something to all this internet nonsense after all. But if you like split level house and you had to love this contradictory market the Dow which moved to a record above eleven thousand seven hundred last Friday couldn't get out of its own way. After the Martin Luther King Jr. holiday. The nonstop dissent cost the index more than 470 points or better than 4 percent but still left the Dow around a still lofty eleven thousand two hundred fifty or about where it was just 10 trading sessions ago.

While those other blue chip indicators the S&P 500 in the New York Stock Exchange composite also declined a bit. There was no stopping Nasdaq Amex or Russell which seem to be operating in an entirely different parallel universe which come to think of it maybe where good elves come from. Our crew are unchanged at a highly bullish plus seven. That's predicting that the Dow will pull itself together and gain another 5 percent or more in the next three months. And our halos tonight go to the five who correctly took that stance three months ago. Since when. Even after this week's sell off the Dow has still gained about seven and a half percent. And once again even the guys in Washington who are claiming credit for this awesome boom continue to be among those astonished by its Dura billeting and vigor. It was announced today that the U.S. had posted a larger than expected budget surplus last month as the treasury again became my principal beneficiary

of the lowest unemployment in three decades. Rising wages and soaring stocks gallium I think those fellows in Washington would be a little more grateful. With me tonight to give us their views on what to expect next for this economy and how the 2000 election may affect it our three old friends of this program who are also top level insiders Lawrence Lindsey is the chief economic advisor to George W. Bush. Larry a former economics professor at Harvard was a key advocate of Ronald Reagan's tax programs who later served in the elder Bush's administration and for five years as a governor of the Federal Reserve Alan Blinder has similarly combined academe with public service. He now counsels Al Gore while continuing as a professor at Princeton. Having served earlier on Bill Clinton's Council of Economic Advisors and is vice chairman of the Federal Reserve and Ed Heinemann the chairman of the advisory a money management firm ISI Group has

outlasted a string of presidents having been voted Wall Street's number one economist for a remarkable 20 years straight. Gentlemen let me begin by asking each of you what's the real reason America will sail through the old record for the country's longest economic expansion next month and how much longer do you expect it to list Larry. Well 20 years ago Lou America decided to trust markets. We deregulated. We cut taxes we brought inflation under control. And that faith in markets is what's seen us through these last 20 years of boom. And I think it will continue to bode well for the U.S. economy in the future. Now and I suspect you don't entirely agree with that analysis not entirely but partly I mean we've had a pretty dramatic restructurings of American industry that sort of set the stage in the late 80s and early 90s and since then we've had a quite remarkable run of good policy and good luck together I mean good fiscal policy and good monetary policy. And it never helps hurts to have some good luck. And you think

the run will continue. I think the run will continue. There are very few clouds on the horizon it's not going to continue forever but the end is not in sight. It would you if you had put technology at the top it is a revolution. And secondly you had put the boom in global competition. And thirdly I'd be on the policy front. We've had good policy and I think that combination has made what we have and that the thing right now is just sparkles in general in terms of looking like it can run further. Larry let's plunge into what may be one of the most significant issues of the fall campaign even though most of my journalistic colleagues say nobody in America cares about tax cuts. You are a great advocate of the idea that below lower taxes lower tax rates that were instituted in the 80s were important part of this boom. George W. Bush's

program while it's denounced by some as too generous in fact would leave the top rates above where they were even in the first of the 90s increases. We had a 28 percent top rate until George Bush became president. It's now effectively probably in the mid 40s for high earners. George W. says let's take a down to 33 percent want to go back to 28. We have a lot of problems in our tax code that have accumulated. And what Governor Bush asked us to do was to identify those problems and see what we could do to solve them. But at the same time respect the fiscal limits the government has. You know it's not only high income earners who have those high rates but single parents trying to get into the middle class have very high rates thanks to changes made in 1903. And we tried to solve problems. High rate problems for those people for high income people and also for married people the middle class. Experience in Washington is that what you asked for in the campaign is better than what you going to get. So if you only

start with 33 what he can wind up with. Well I think we're going to wind up with 33 I think what Governor Bush is proposing is a platform he can run on Win and enact as soon as he takes office. The criticism not all from Democrats is that the Reagan tax cuts produced the huge deficits of the late 80s and therefore only the so-called more responsible policies of the 90s corrected it except that we had a lot to do in the 80s. We had to make up for an economic mess caused in the late 1990s. We had to bring high rates down. Remember the 49 percent bracket started at forty one thousand five hundred dollars when Ronald Reagan took office. I doubt we would still have this expansion going at all if we had left those pre Reagan rates in place. And we're going to rebuild our defenses. Did the Reagan tax cut cause the inflation problem. No I think I think what happened was that the Reagan tax cut cushioned a disinflationary policy by the Fed and brought

inflation down very sharply from double digits down to 4 percent. True with the recession but one which would have been a lot worse had the Reagan tax cuts not been active. Many Americans feel that. Whatever the rights and wrongs of the Clinton tax increases the economy's done pretty well since then why should we fool with them. Well the economy has done well again I think what we have in place is a set of long term policies of relatively moderate taxation a relatively sound regulation and what we need is some fine tuning of those policies designed to give back to the people who produce this expansion the private sector. Some of the fruits of what they are and what would be the most significant economic change if George W. Bush will have to present this year. I think the most significant change is one that Governor Bush has committed himself to. He will spend the political capital necessary to solve the Social Security mess something that's not been done in the last seven years in spite of a boom and it's going to take a guy coming into office committed to do that to knock heads together in Washington to solve the problem.

How will he be spending political capital. Well presidents come in with a little bit of goodwill. And what they have to do is use that power of their mandate to convince people in Congress to compromise. And Bush has done that as governor. And I think he'd be outstanding at doing that in Washington as well who people have the right to invest their Social Security funds any way they want to. What Bush has proposed is establishing personal accounts that will allow people to invest there or at least a portion of their Social Security funds as they wish. Now when have we avoided the social security measure for seven years. It is it continues to be pushed back by the stronger economy but it's out there I mean when you think about social security you need to think in a 50 75 year framework and there's very little doubt that in the long run it's going to need some change to be some changes in Social Security including infusing revenue that mean higher taxes. We hope not. It means devoting a lot of these surpluses as

Vice President Gore has recommended and others have recommended to the cause of filling the hole. There's a kind of an actuarial hole in the Social Security system and it needs filling. A few years ago President Clinton told us the era of big government is over. You apparently didn't say positively. Does Al Gore believe that the era of big government is over. I think he believes that in the same sense that President Clinton said it he didn't mean that government should shrink away into a corner and not do anything. But the era of ever expanding government of course it's been contracting in the Clinton Gore administration and the idea that government can do everything is gone by the board but that does not mean the government can't do anything and neither president nor Vice President Gore believe that would President Gore as president favor the right to invest Social Security funds privately. I think not. And I think he's right to do to have that attitude. There are an awful lot of people you know most people are not as sophisticated as the people who watch your show about investments a lot they're quite anyone else. There are quite a few

Americans that really know the difference in a stock in a box for example and the potential transactions costs of these minuscule investment accounts are huge they can just gobble up the returns. Is there a place for tax cuts under President Gore. Absolutely and the vice president has proposed some tax cuts already and there likely will be more proposals as the budget merits it. What Vice President Gore wants to be absolutely sure of is that we don't start giving away our spending money that we don't have. What would be the most significant change from a President Clinton to a President Gore in terms of economic policy. Well you know frankly I think in economic policy or in economic policy you're largely looking at a continuation if you think about what the Clinton-Gore administration has meant it's meant fiscal responsibility first cutting the deficit then turning it to the surplus in the gourd ministration it will mean a considerable withering of the national debt for example and it's meant targeting your spending and tax programs so you don't spend too much of the taxpayers money.

Ed Hyman you indicated in your answer that well the first question that was you thought there was some credit to be given to public policy that you started with private developments. Is that going to be the future as well. It would have to look to the private sector for most of the news. The I think the the technology part. Will contain a role. That looks if anything the strongest has been in the period and global competition looks as vibrant and strong as it's been and should continue. And I think on the policy side that's where things could change because we've been in a period where we've had a theme of government downsizing all around the world. And I think that's done a lot to free up resources for the private sector and now with budget surpluses big at the state local and federal level. Government spending is starting to accelerate. And that could start to add some heat to the economy that's already pretty hot to begin with.

You run close to a billion dollars in bond funds. Would the tax cuts of significance so scare the bond market that interest rates would go up probably. Can they tolerate any tax cuts in the bond market. Probably not. It's always been the question of the economic backdrop and the tax cuts that would be considered now wouldn't be put in place until 2001 so it's you know by maybe 2001 it would be good to have a tax cut. But at this moment I think that on top of a strong economy and the global economy is picking up. If you had fiscal stimulus. It pushed up interest rates. Let's cast cast your vote as between Governor Bush Vice President Gore and you can add Senator Bradley's and McCain's to you for being with those who want to head who has the most sensible economic program in your view. I see none of them in my view. Why does that not surprise me. I think you know what has been so remarkable in the

past decade is that government spending has been restrained and with the budget surpluses that's now starting to change. And if you have a little bit more government spending and some tax cuts on top of a hot economy and a global upswing that could overheat things. Larry we hear very little from Governor Bush because you spend indeed he suggested the other day it was necessary to cut spending is that right. I don't think you suggested that at all I think what we have to do is bring spending under control. There's no question be better off not having a cheerleader for more spending in the White House. Having someone who believes in fiscal discipline. The real question is whether you want to leave the money in Washington or you want to give it back to the people whose money it is the people who are in it. And I think that's the fundamental difference we face. Will he propose spending cuts or just holding the line. Well we have a comprehensive package that will be coming out over the. Election season it's of it's a long election season. But Governor Bush certainly will

propose cuts as he did in Texas. Well I remember when President elect Reagan was going to eliminate the Department of Energy in education these things that are really going to occur. Well I don't think either of those is on the agenda. I do think that the key is going to be downsizing the domestic side of government and making it operate more efficiently. All of the so-called savings we've gotten have come from really Gore Goring our defense capabilities the domestic side of government's increase and I think we have to get more efficiency out of government the same way the private sector has gotten more efficiency out of the resources it has to work with. Well you and Allen might seem to casual observers to be on opposite sides of the fence for a couple issues which you seem to agree I want to discuss each of the two with you and then bring Ellen in on this first of all. Do you think monetary policy at the Federal Reserve was pretty good. Sure and Al and I were both there so how could we argue with you. We're going to raise rates next month and then again in March.

That's up to Chairman Greenspan and his colleagues but I would say yes I think it's a good idea. I think what Greenspan said last week was it was very important. One of the problems of the current expansion is that we are funding it by borrowing from overseas. We had a record inflow of capital this year as a share of GNP or however you want to look at it. It's growing it's when you can bigger this year that is not sustainable and the price of money is going up around the world. The Fed is going to have to fall the price of money up. One of the other things you to share is you both have pretty badly missed the stock market. You rather famously exited a couple of years and 3000 points ago. Our best on this program a year ago some skepticism about it. You think the stock market's a bubble. Well I'm going to let your other people on the show tell you how to play the stock market. I have very low tolerance for losing my own money. So I like to sleep at night.

So maybe the Fed shouldn't be spending so much time analyzing the stock market if its forecasts of when have not been too valuable. Well I think when we run the Fed we were allowed to invest in the stock market about the stake and I don't think they do it there but I do think there's an imbalance of supply and demand and that's what the Fed has to right. Alan are you any more encouraged about the stock market where you are. I've given up trying to predict the stock market I want to remind you a year ago you forced me to predict the stock market against my will. Marquis de sod. How about that I'm about out of it. I'll tell you that you're not you know I know means of my own. So you become the pro-capitalist marketeer. I've been a pro-capitalist marketeer for a long I mean as compared with some of these other people well I don't know markets but don't know the source of competition to get heavy stuff. Let's talk about interest rates. You agree that they're going up next month and I mean I think they are almost certain to go up next month and they may go up the month after but I don't think the February 2nd increase will be the last let's put it that. Since your man is the incumbent traditionally the incumbent fears interest rate increases in election year is there any danger that will produce a recession.

I think very little bet is definitely not the Fed's intent and has not been the Fed's intent throughout this expansion. We raise the interest rates in 94 5 without the intent of causing a recession for sure and we didn't and the Fed is trying to do a duplicate of that soft landing now not to cause a recession. I think they have a reasonable chance to succeed. A nonpartisan observer like myself listening to the two of you here's you showing great similarity in some of your views. It is a dramatic issue which stake economically in this election. I think there's a potentially dramatic issue which is fiscal responsibility. I think there's a very large risk that a plan of the nature of Governor Bush is going to blow a hole in the budget that we can ill afford and if you look at the history of the 1990s starting by the way with George Bush the elder George Bush the success formula has consisted of tightening up on fiscal policy so that monetary policy could be easier than it otherwise would be and that forms a great environment for investment and the investment boom has been the golden goose of this

expansion. Larry we'll let you have the last word we know you out of time but are you going to blow a hole in the economy. Absolutely not. The budget surplus is going to grow under the tax plan that Governor Bush proposed. Well one of you guys may be right. Thank you very much for being with us tonight Larry Lindsey. Alan Blinder Ed Hyman I hope you'll be back again next week. Let me get a look into what you can expect next in the warp speed changes affecting your personal financial services. My guest Jim Schmidt is a top expert on a business that used to ask you all the questions and now has to face a few big questions itself. So check it out. Meanwhile this has been last week. I'm Louis Rukeyser. Tonight Wall Street Week With Louis Rukeyser is produced in association with Kaiser television incorporated by American Public Television made possible by

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