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American Morning

Economic Skies Have Turned Considerably Cloudier

Aired November 30, 2001 - 07:40   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
PAULA ZAHN, CNN ANCHOR: Not so long ago the nation's economic forecast was filled with large and growing surpluses, but the skies have turned considerably cloudier. Forecasters are now predicting -- quote -- "persistent deficits." Mitch Daniels, Director of the Offices of Management and Budget said this yesterday.

We are unlikely to return to balance in the federal accounts before possibly fiscal '05. Things will have to break right for us to do just that. So what happened? How do we recover? We turn to Robert Reich, Labor Secretary during those sunny days of the 1990s. He comes to us from Boston this morning. Nice to see you. Good to have you on the show this morning.

ROBERT REICH, FORMER LABOR SECRETARY: Well Paula, how are you this morning?

ZAHN: I'm fine, thanks, so ...

REICH: Why am I always the bearer of bad news?

ZAHN: Yes I'm wondering about that Robert. It seems to follow you around.

REICH: I don't know ...

(CROSSTALK)

ZAHN: What happened to that ...

(CROSSTALK)

REICH: A little cloud over me. Well I'll tell you Paula ...

ZAHN: What happened to the surplus?

REICH: In terms of that deficit that we're now seeing, basically it's not rocket science. You have a recession that means fewer dollars going to the federal treasury because people are not making that much money plus you have some more expenditures that were not counted on such as the war in Afghanistan and security - domestic security, and you have the beginnings of a tax cut - certainly a tax cut that's going to take a big affect in 2004. That is the Bush taxcut of last year. You put that all together, again, you don't have to be a rocket scientist. That means deficits. ZAHN: Let's talk for a moment about how we fix this. We know that the government is now saying we're in a recession. Congress and the president are trying to come up with some kind of economic stimulus plan. Boy, are they duking (ph) that one out. Let's listen to what Treasury Secretary Paul O'Neill had to say about that last night on "MONEYLINE".

(BEGIN VIDEOCLIP)

PAUL O'NEILL, TREASURY SECRETARY: The stimulus that's been recommended by the president will raise the level of real economic growth by a half of percentage point and that half of percentage point has profound implications for the number of people that continue to be employed.

(END VIDEOCLIP)

ZAHN: So what do you think Robert? Could it prevent a further economic slide?

REICH: Well Paula there are really two instruments that the federal government has to keep the economy going. One is to reduce interest rates and that's the Federal Reserve Board. They've done it 10 times since January. Hopefully, they'll continue to do it, but they're now down to about two percent - that's short-term federal funds rate down to two percent - not much lower they can go.

The second instrument is called fiscal policy - that's government spending and tax cuts. That's what we're seeing in Washington right now, the big fight between Democrats and Republicans over a so-called stimulus package. There ought to be one. I'm giving up much hope that there will be an agreement because Democrats and Republicans are still very, very far apart.

But to some extent, hopefully, there will be an additional short- term taxcut, additional short-term spending to get the economy going, even if it means larger deficits in the short term, Paula, that's OK. What we have to be wary of is when the economy recovers, then we don't want to have deficits - then we want to go back into ideally surplus.

ZAHN: So why are larger deficits OK in the short term?

REICH: Because if certain - you know you have consumers very scared right now. Consumers are holding back. They're pulling in their belts. You also have businesses not making investments because they are concerned about the future. They already stopped making investments way before consumers stopped investing and consuming.

So the only one left essentially to be the pump primer, to continue the economy, to make sure that there's enough money in the economy is government. And in terms of getting consumers more confident, a taxcut that can put more money in consumers' pockets, and I'm talking about not a taxcut necessarily for people who are in the top one percent of income.

They already spend as much as they're going to spend. We're talking about a tax cut that goes to the average working person - middle class, lower middle class, maybe a payroll taxcut temporarily in FICA, Social Security. That's something that a lot of people on both Republican and Democratic side are now talking about - something like that to put money into people's pockets and made them feel a little bit better and more confident, would be very important right now.

ZAHN: Let's go back to the cold hard reality of the politics that play here. You said the two sides are very far apart. You're hopeful they'll come up with some kind of compromise and yet you wrote in "The Los Angeles Times" this week a quote, "Democrats won't go with a bigger stimulus because they're still under the illusion that all deficits are bad. Republicans won't give up their taxcuts for corporations and the rich because they still cling to President Reagan's supply side mantra, which supposedly spurred entrepreneurial zeal. So what do you end up with here?

REICH: Well hopefully you'll end up with a bigger stimulus package than the Democrats are now talking about. Something in the order - it seems to me about 100 to maybe even $200 billion. That's still only one to two percent of the entire national economy. We're a $10-trillion economy - let's not forget that. But you have something a little bit more ambitious than the Democrats want, but it is not a taxcut for big corporations and for very wealthy people.

Big corporations are not going to invest more because they are over invested already. They have access capacity - too many - too much equipment; too much plant. They're not going to invest more until consumers go back to the stores and buy more, and if you're very rich, again, you're already spending as much as you want. You're not going to spend more if you get a taxcut. What we need is money in the pockets of average working people. And that's where ...

(CROSSTALK)

REICH: ... that's where you might have a compromise. Again, you might have a compromise around reducing the payroll - the social security FICA tax, because both sides see something in that they can buy.

ZAHN: Well let me ask you this. You've got consumers out there, the ones you just touched upon, are scratching their head saying give me a break. The government has just admitted that we're in a recession. We've known that. We've known - and I know it's easy to get hung up on the classic definitions of what a recession is ...

REICH: Oh yes. I mean ...

ZAHN: What is - what is your message to those folks today?

(CROSSTALK)

ZAHN: Give me a break.

REICH: Look at a lot of people are hurting right now and a lot of people would like to have a taxcut that affected them. If they saw that that FICA, that social security payroll tax, was no longer being deducted up to - let's say - let's say the first $10,000 of your income was exempt from FICA social security payroll tax. Now that means money directly in people's pockets and people need it right now.

They're worried understandably, justifiably. Consumer debt is very high. Savings are at a 70-year low. They're worried about the future. They're worried about their jobs. They're not going to go back to the malls unless they have a little bit more confidence. And that is a confidence building measure - exempt the first $10,000 of income from social security payroll FICA taxes.

ZAHN: You're still so passionate about all this. Do you miss being in government?

REICH: Well I - you know I do in a way, but it's tough work, Paula. My heart goes out to the people who are in Washington. They are not there because their egos need it. For the most part, they're there because they really care about the issues, whether they're Republican or Democrat, and now especially when we're dealing with not only an economic crisis, but we're dealing with terrorism around the world. These are very tough times and these are very pressured jobs. So I'm not terribly unhappy I'm up here right now in Boston.

ZAHN: And you're teaching, right?

REICH: And I'm teaching at Brandeis University and I love my students.

ZAHN: Well you get different critics in that sort of population too, as well.

(CROSSTALK)

ZAHN: You're probably always under fire, aren't you?

REICH: Yes, in one way or another I am. Paula, it's great to see you again.

ZAHN: Robert Reich, always a pleasure to have you on the air. Have a good weekend.

REICH: Bye-bye.

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