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September 27, 2004

Host: Michael Grant
Topics:
· Presidential Economics;
· Paul Krugman
In-Studio Guests:
· Congressman Jeff Flake, co-chairman, Bush/Cheney '04 Arizona Leadership Team;
· Roger Altman, former Treasury Deputy Secretary under Bill Clinton and currently a Kerry economic advisor
· Dawn McLaren, research economist, L. William Seidman Research Institute, Arizona State University

>> Michael Grant:
Tonight on "Horizon," a look at economic policies on both the presidential campaigns. The president says the economy is "turning the corner," but his challenger says tax cuts and deficit spending could create another recession. Economist Paul Krugman throws in his two cents.

>> Michael Grant:
Good evening, I'm Michael Grant. October 13th, President Bush and Senator Kerry will come to Arizona State University for their third and final debate, which will focus on domestic issues. Certainly the economy will be part of the conversation. We'll analyze their policies, but first, dueling messages from a co-chairman of the Bush/Cheney '04 Arizona Leadership Team, Congressman Jeff Flake, and a former treasury deputy secretary under Bill Clinton and currently, Kerry economic advisor, Roger Altman.

>> Jeff Flake:
Well, tax cuts put money in the hands of individuals, and individuals spend money better than government does. In the absence of the tax cuts, we just have increased government spending. The Democrats will like to say, we'll pay down the deficit. They don't. Every time we propose a bill, the Democrats propose a substitute bill on the house floor, and every time, the substitute bill is larger than the house passed bill. So this notion that this money, instead of going to tax cuts would be used to pay down the debt and to pay down the deficit, the current year deficit is simply wrong. It just doesn't happen under Democrats. So, I think that we do far too much spending as it is, and that's really the fault of the congress, a lot more than the president, but boy, under Democrats, we'd be spending a lot more.

>> Roger Altman:
We have seen a stunning reversal on the federal budget. When Mr. Bush took office, he inherited what Goldman Sachs estimated to be a $5.5 billion surplus. Today almost four years later, the same source, Goldman Sachs estimates it's a $5 million plus deficit. It's the biggest fiscal reverse in American history. We've never had a reverse Sal as big as that in this short of a period. It's very damaging. Very damaging. It's damaging to confidence, it's damaging in particular to private investment and to private standards of living. Senator Kerry is not in favor of privatizing Social Security. We do not need to do that. It is not broken and does not need to be fixed. The latest estimates estimated that Social Security will be solvent through 2050, which was a 10-year extension over its prior estimate. If we get our budget in order here, get it back into balance, back into surplus, we can meet our Social Security obligations. The bigger problem by far is Medicare, but that's not where the privatization proposal has been made. It would also be expensive. Most private analysts estimate that it would cost a trillion-five, to two trillion to privatize Social Security. You are going to guarantee the same level of benefits. If they it doesn't work you get a guarantee any way. You are taking the payroll tax and withdrawing part of it. So the liability of the American government goes way up under that proposal.

>> Jeff Flake:
I'm in favor of having personal retirement accounts. I have a bill along with others to that effect. There is another bill as well. So two main bills that talk about big accounts. Ours would take $6.2% that individuals pay, employers match that with another 6.2, but 6.2 you pay would be put in a private account, and as soon as you accumulate a sufficient funds in that private account, you have more discretion as to where to invest those. Those are your funds. They stay with you. They are passed onto your heirs. You control them instead of the government. That's important. The president talks about an ownership society. That's the most critical aspect of it. Milton Freedman talked about this as well. He talked about how the best thing we can do is simply cut taxes, cut taxes, cut taxes. At some point the population will be fed up enough with the deficit or it will have other effects that are not good, and so they'll say, enough of this spending, and that's the only way, he believes, you can get spending under control. I can tell you, having been in the house now for four years, he may be right. We try to curtail spending, a few of us, it's darn tough, because it really -- what has surprised me most about the congress is the propensity to spend. So, I think that there is something to that, that the only way you can keep the government from spending is to deny it revenue, and until you do, it's simply going to spend. The temptation is simply too great.

>> Roger Altman;
I think that is behind a lot of this. Strategic deficits, where the goal is not economic policy, it's actually the philosophy of government, that as you say, if you withdraw the ref my from the government, it has to shrink and we'll get a smaller government, I mean, a lot smaller government, that's what the people who want continue you continuous tax cuts really actually are seeking. I think there is a lot to that. The types of deficits we have are just severely damaging. There is a certain simple rule in economics. Private savings pay for investment, investment is what drives productivity, productivity is what drives standards of living. If you think about it, how do standards of living go up? We automate, improve technology, those are things that investment pays for. So if you are running giant deficits, they are soaking up the pool of savings, which means investment is lower, productivity is lower, and standards of living are lower than they otherwise will be. We have gotten giant deficits under Bush, falling standards of living. Incomes are going down.

>> Michael Grant:
Joining me now to talk about the policy, a research economist with the L. William Seidman Research Institute here at ASU, Dawn McLaren. Dawn, I haven't seen you for a while.

>> Dawn McLaren:
Good evening, how are you.

>> Michael Grant:
Let's start with the -- regardless of who wins this race, does the president have, in context, a lot to do with the economy one way or the other?

>> Dawn McLaren:
It's my opinion that he really doesn't. There are so many other factors that go into it. For instance, what the federal reserve bank does, what the congress does, the different policies that are already in place, the different things that are already mandated that he has to do. So in the end, the president has very little that he can do to move the economy this way or that. Certainly by implementing certain policies and by, for instance, taking the country into a war, things like that, those can have very significant effects, so he can have that effect, but there is a check and a balance to that. He can't do that without congress.

>> Michael Grant:
Right. For example, his bully pulpit economically, he can argue for tax cuts or tax increases, but congress is going to be the final say.

>> Dawn McLaren:
Exactly. And then, of course, I think the fed has an incredible amount to do with it as well.

>> Michael Grant:
So Alan Greenspan is the real president on economics?

>> Dawn McLAren:
You could say that.

>> Michael Grant:
Let's go to the recession. You were offering before the program, and I had forgotten about this, that maybe the real culprit and cause of the recession was in fact Y2K?

>> Dawn McLaren:
Yes, yes. In fact, as you know, I do the Arizona business conditions index where we poll purchasing managers and see what they are doing each month, and what we saw right about -- just before the recession, was a huge buildup in what they had purchased, and then an incredible dropoff, but their inventories were still high. So what they did was because they expected that on January 1st 2000, they were not going to be able to get anything from their supplier who may not have been Y2K compliant as they were, they quickly horded all of this stuff, had 6 to 9 months worth of stuff on inventory, so that they didn't need to worry for the next six months and then they realized well their supplier was Y2K compliant after all and there was nothing they could do. They had to sit and drain out their inventory.

>> Michael Grant:
Because they had built it up.

>> Dawn McLAren:
Yes.

>> Michael Grant:
Because of the concern of being Y2K compliant and not wanting to be shut down, purchases of computer equipment, were accelerated to '97, '98, 5099.

>> Dawn McLaren:
Exactly. Everything was piled up in the end of 1999 period so that they would be ready for the next year, and they were. The only problem is it put us into this inventory cycle that created our recession.

>> Michael Grant:
The recession is definitely over, though?

>> Dawn McLaren:
Yeah, it's definitely over. It just hasn't felt like it for very long because our job situation hasn't been that great. For the general population, we think of a recession as being over when we have a job.

>> Michael Grant:
How is it that both sides offer quite confidently -- I will characterize the Kerry argument, we have lost a million jobs under George Bush --

>> Dawn McLaren:
Yes.

>> Michael Grant:
And just as confidently, the Bush Administration will say, we have turned the corner and we have had for the past several months job growth.

>> Dawn McLAren:
Yes, in fact, they'll say there has been job growth, if you are looking from when bush started office, if you look at what Kerry is saying, he's saying yes, we've got a million jobs lost, where the bush says yes, we've got almost 2 million jobs gained. There are two different surveys. One called the household survey and another one called the establishment survey. They are both done by the Bureau of Labor Statistics, but they interview different people and they include different workers in that. For instance, the household survey, of course, interviews households. They ask them, do you have a job. Included in that are unpaid family members, people who have unincorporated businesses in their homes, for instance, anything from having a little Mary Kay business, to writing computer software at home

>> Michael Grant:
Consulting?

>> Dawn McLaren:
All sorts of different -- all kinds of different things. It includes all of those in there. The other survey is the establishment survey. That one looks at payroll employment. Economists feel more confident about the establishment survey than the household survey. That's a huge disparity, with the household survey showing much more employment, and the establishment survey still showing job losses.

>> Michael Grant:
As we move to more of a service-based economy, though, I mean, certainly I see a lot more people working out of their homes and out of their cars and off of their cellular phones and in nontraditional environments than I used to see.

>> Dawn McLaren:
Exactly. So it's a little bit of a controversy there as to what you'd like to see. You can put it two ways. You can say you have a computer consultant who is at home running his office out of his home and making lots and lots of money, and then you can have someone who is making jewelry and it's a very informal sector type of thing. That payroll employment is our formal sector, and if you are starting to look at that informal sector as being important, the sector that doesn't have insurance or doesn't have benefits associated with their job, then we might have a problem.

>> Michael Grant:
All right. Another obvious disagreement between the camps on best approach is not so much tax cuts, although I think there is a basic disagreement in philosophy there, but the Kerry campaign has tried to shade that a little bit by saying we're not against tax cuts necessarily. We feel, however, that they have been given to the wrong people.

>> Dawn McLaren:
Right, and also, the tax cuts haven't, in my mind been tax cuts, because the spending hasn't been cut to go along with it. So we have created a huge federal deficit. Our tax cuts really weren't tax cuts, if you see what I'm saying. We now have a huge deficit that we're going to have to pay for one way or another. It'll come out in the wash whether we have to have increased taxes to end up paying for that deficit, or if we cut programs to pay for that deficit, or -- and this is what one of the people earlier was talking about -- was the fact that private investment is crowded out, because interest rates are pushed up. The government is now competing for credit, and right now, we have an economy that our growth is dependent on credit, on low mortgage rates, all of that.

>> Michael Grant:
Dawn, starting in the mid-'6os, though, we went on a significant deficit spending binge that lasted for a long time under both Democrats and Republicans. We had certainly better times and worse economic times during that 30-year period. I'm not sure that most of us, though, ever saw a direct nexus between the deficits and whether or not we were up and down? Is there a clear direct nexus?

>> Dawn McLaren:
There is. The problem is you have so many other things playing at the same time. What you have to say is all other things equal. Well, the deficits at that time were very different than the deficits we have right now, because the deficits right now, first of all have grown a huge amount, and second of all, you have to look at the percent of GDP that they are. If it's a significant portion of GDP, which right now it is, in fact, the level that it is right now would get us kicked out of the European Union if we were in the European union, they would say you are in trouble here, you need to reduce your deficits. Obviously, it's an accepted level, but it's too much.

>> Michael Grant:
One final question. I heard Altman made the comment that Social Security is solvent until the year 2050. I don't think I've ever heard that from anybody.

>> Dawn McLaren:
That's a very interesting thing. The figures that I have heard are more towards 2035, 2030, around that period of time, but the whole privatization thing is interesting too, because the way Social Security works, is that workers today pay retired people today. There is no fund to put money into. So when they are talking about privatizing and saying you'll have your own money, you take your own money and you put it in somewhere, what are we going to do with those retirees in between. Is somebody going to have to pay both for their own and another one? And then, of course, if the government sells off a -- or privatizes one of their businesses, it's probably because it's not making them any money.

>> Michael Grant:
A lot of IOUs sitting in the trust fund.

>> Dawn McLaren:
Exactly.

>> Michael Grant:
Dawn McLaren, we are out of time. Thank you very much.

>> Michael Grant:
Paul Krugman is author of "The Great Unraveling, Losing Our Way in the New Century." The Princeton economist is also a "New York Times" columnist and a critic of the Bush Administration. He visited ASU last week as part of the Jonathan and Maxine Marshall Distinguished Lecture Series. Producer Larry Lemmons spoke with him.

>> Reporter
Larry Lemmons: When the "New York Times" approached you in 1999 to do the column for them, obviously things were different in those days.

>> Paul Krugman:
That's right.

>> Reporter Larry Lemmons: :
Things changed. Can you tell us exactly the process you went through when you noticed that change?

>> Paul Krugman:
Yeah. I mean, what I thought, what the "times" thought was that the economy was booming. It was interesting. Remember how much fun it all was in 1999? People were making money. There were funny things, absurdities companies that didn't have product but were worth $10 billion. They thought I would be writing about all of that stuff. There were big problems. We were coming off the Asian financial crisis. They thought I would write about that sort of stuff, too, but not really about politics in the United States, because you know, we had sound policies and we had a healthy economy and it was all going to be kind of a lighter general Lee, column than the usual heavy foreign affairs stuff. I started writing in early 2000 and after a few months, I started seeing something really going wrong here in the election campaign. You've got one side with policy proposals that literally don't add up. They are two minus one equals four. They are lying about how things work. And no one is really calling them on it. So I began this gradual process of becoming increasingly political, and increasingly radicalized but not about policy. I'm still very moderate on policy, but about what the heck is happening here to our country.

>> Reporter Larry Lemmons:
After 9/11, obviously things were different and a lot of journalists were reluctant to criticize the administration about anything, but you were one of the few who did.

>> Paul Krugman :
Yeah, I was -- it was partly -- part of it was that I was close to the area in which the -- you could see very quickly that 9/11 changed nothing. I was getting what they were trying to ram through in terms of economic policy within days of 9/11. They were actually saying okay, you can't depose us now because of 9/11 and we want tax cuts for rich people. I could see that right away. So I was close to it. The other thing was, I think a lot of people were really reluctant to take the administration on because Bush was so popular, and it was a real problem -- it looked like the kiss of death for a journalistic career to take these people on at that point, and since I don't really care about my journalistic career, you know, my life would be a lot easier if the "Times" fires me, I was more prepared to take risks.

>> Reporter Larry Lemmons:
You mentioned before this, journalism isn't really your day job, you are not really restricted per se like many journalists are in what you say, and you are also not prone to being bound by this journalistic mindset sometimes.

>> Paul Krugman :
Yeah, I mean, I'm not sure -- for the "times" it's probably a problem. If I don't know what's going on in inner circles in Washington -- because I'm not there, I don't talk to these people or hang out with them -- but on the other hand I'm able to see things that you can't see if you are too close, and I don't care about access. I mean, look, the real heroes of the reporting on Iraq before the war began turned out to have been people like the journalists at Knight Ridder news were who were not bullied by the threat of loss of access because they didn't have access to begin with because they weren't a high prestige chain. In a way I had that same advantage, which I never saw an access. I can't be bullied into writing something favorable about the secretary of the treasury because I'm not afraid of being invited to an inside interview with him. I don't care about the secretary of sector or the secretary of defense.

>> Larry Lemmons:
Your book is called "the great unraveling." I presume it's about the unraveling of the economy from the time you began the column until now. I also wonder, if also an unraveling of things like the Great Society, or the New Deal?

>> Paul Krugman:
Well what I meant by the title is basically things are coming apart all across the board. It's the unraveling -- now, the new deal, Social Security, Medicare, medicate are so far intact, but the fiscal basis for them is gone because the tax cuts gutted federal revenue. And I think I mean something broader than that, the whole kind of centrist consensus that we built American politics around. There is no center in congress now. There is -- you want to say lets have men of good will decide how to solve our problems in a nonpartisan way, that doesn't happen anymore. We don't have that. There are no wise men. There is no core. There is this bitter, bitter partisanship that dominates everything.

>> Reporter Larry Lemmons:
The deficit is huge at the moment. The Iraq war is being waged. Tax cuts are still in place. What's the state of the economy?

>> Paul Krugman:
Right now, we're not paying an immediate economic price for the deficits because we're able to borrow. Now, if you take a look at any kind of reasonable forecast, the U.S. appears to be insolvent. If we were a third world country, we'd be in deep crisis already. Financial markets give us the benefit of the doubt because they say, well, this is America. It's a first world country, which means that we can -- countries like America are always able to raise tax it is they need to, which is true. We have the technical capacity, we're not like Iraq where they can't raise taxes or we're not like Brazil. We can raise the money. But the markets also believe, first world companies are politically responsible, even if they go through bouts of deficit, they pull themselves together, America is not a banana republic. I look at the politics of it, look at what it will take to bring this deficit under control, if we ever do, it requires either a rollback of pretty much all of the tax cuts we got in the last couple of years, or huge cuts in the basic social insurance programs, both of which look politically impossible, and if that's the case, we are a banana republic. We're not able to deal with our problems. So I think there is going to come a moment, sometime in the next few years when the financial markets, when the bond market basically signals a huge loss of confidence in the U.S That's when it becomes nasty.

>> Reporter Larry Lemmons:
What's the worst case scenario?

>> Paul Krugman:
The worst case scenario is dollar plunges, interest rates shoot up by 400, 500, 600 basis points and then we get a wave of bankruptcy, because we have lots of people, particularly lots of homeowners with adjustable rate mortgages who could not handle the increase in rates. And we get financial disruption rippling through economy. It's kind of like what you see happening in Latin American countries when they have their crises, although, the real big problem is they have debts in dollars and assets in pesos and we have debts in dollars and assets in dollars, so we don't have that problem, but you still have a nasty domino effect running through the economy. That's the vision that has me scared and it has very sensible people like Paul Volker and Robert Volker too.

>> Larry Lemmons:
Let's turn that around. Can you see a best-case scenario?

>> Paul Krugman:
Sure, we have the great uprising of public saying we're sick of this nonsense, and we get a big turn towards moderation. The president, you know, name your president, congress, that's willing to deal, and they go back and they say, what does it take? The truth is -- on the revenue side, tax cuts, the Bush tax cuts have been sliced kind of neatly. There are the major portion of them is stuff that really only benefits very high income people, but then there is other stuff, child tax credits, marriage penalty provision, the little -- some people went from 15% to a 10% rate. You can leave those in place, if you leave those in place, you are really not raising taxes significantly on 80% of the population. But if you get rid of the rest, you reclaim 80% of the lost revenue. That's a big chunk towards getting ourselves back towards fiscal Sanity. You also have to look for some spending cuts. You would probably have to do some trimming of Social Security benefits, some economy measures on Medicare, and also look for a little bit of, you know, we can save a significant amount by cancelling missile defense which doesn't work and so put all of those things together and you have a reasonable chance. It's technically not hard at all.

>> Reporter Larry Lemmons:
Thank you very much Dr. Krugman.

>> Paul Krugman:
Thank you.

>> Michael Grant:
"Horizon" and Channel 8 are your home for the presidential debates. You can see all of them live. Here is the schedule. The presidential debate is this Thursday. It covers foreign policy. On Tuesday, October 5th is the one vice-presidential debate. Friday, October 8th is the town hall format debate, covering all issues. And the final matchup between President George W. Bush and Senator Kerry is Wednesday, October 13th. That is the one here in Tempe. It covers domestic issues. All four debates begin at 6 p.m.

>> Reporter Paul Atkinson:
To be elected a justice of the peace, you have to be 18 or over and have a high school education, but a Supreme Court order requires temporary Justices of the peace to be lawyers. Now, Prop 103 seeks to change back those qualifications. The debate, Tuesday at 7:00 on "Horizon."

>> Michael Grant:
Wednesday, a look at hunger in Arizona with St. Mary's Food Bank. Thank for joining us on this Monday evening. I'm Michael Grant. I hope you have a great one. Good night.

 

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