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Will Tax Cuts Create Jobs?; American Airlines Steers Clear of Near-Miss Bankruptcy; Another Suicide Bombing Shakes Israel

Aired May 3, 2003 - 13:00   ET


ANNOUNCER: From New York City, where money talks and the whole world listens, this is IN THE MONEY.
JACK CAFFERTY, HOST: Welcome. Good afternoon. I'm Jack Cafferty. The war in Iraq is over, but we're not. The set's new. Some of the people are different, but our mission remains the same. On this program, we're going to look at some of the big stories of the week and see how finances fit into the picture.

On today's program, paying less, working more. The president says big tax cuts will create over a million new jobs. Not everybody goes along with that, though.

Stormy skies. American Airlines steers out of a near-miss with bankruptcy, as the ride gets rougher for the industry over all. We will tell you the forces that could change and are changing the way we all fly.

Also, bent on destruction. Another suicide attack shakes Israel, as Washington hands out its road map for peace in the Middle East. Let's find out, as we move along here today, whether Israel and the Palestinians are finally ready to make what has been a very difficult journey so far.

Joining me today, CNN financial reporter Susan Lisovicz and Andy Serwer, "Fortune" magazine editor-at-large. What do you think, one from column A, one from column B?

ANDY SERWER, EDITOR-AT-LARGE, "FORTUNE" MAGAZINE: Well, it's -- to me it's interesting, move from the war in Iraq to the economy. And his going to be his big challenge moving forward. The elections not that far off, and he's got to be looking at it.

SUSAN LISOVICZ, CNN FINANCIAL NEWS CORRESPONDENT: It's not a slam dunk by any means. He has these fabulous approving rating, more than 70 percent. That's great. If you just judge the president by the economy, much, much lower.

And then you have the Middle East. And that road map, that very bumpy road map. So, he's got a couple of critical issues.

CAFFERTY: The jobs report came out on Friday. Unemployment up to 6 percent. Another 48,000 jobs lost and, of course, the economy, most experts would agree, cost President Bush's father his shot at re- election back after Operation Desert Storm. Moving ahead, with Congress divided on the details, President Bush's proposed tax cut has been squeezed from $726 billion to $550 billion to a top figure being espoused by many in the Senate of no more than $350 billion. The president claims the tax cuts will give the economy a much needed boost and lead to the creation of $1.4 million jobs, if he gets everything he wants, but the Democrats and the Federal Reserve, Alan Greenspan in particular, think the tax cuts might actually hurt the economy.

The president's pitch comes as he prepares campaign for a second term. For a closer look at particulars of the president's plan, we are joined in Washington, by CNN's White House correspondent Dana Bash. Dana, welcome.

DANA BASH, CNN WHITE HOUSE CORRESPONDENT: Hi, Jack. Well, thanks for having me. You know, this is a critical time for the president's economic package because it's next week that the House tax writing committee and the Senate tax writing committee will actually start to do their work, and despite the fact that Republicans are in control of both houses of Congress, it is, as you mentioned, going to be a very uphill -- an uphill battle for the president to get what he wants.

Now, let's go after what the president proposed back in January. First of all, he proposed a $726 billion plan. And some of the highlights are accelerating the 2001 tax cuts, eliminating full -- fully eliminating -- taxes on dividends, tax breaks for businesses who purchase new equipment, and new training accounts for the unemployed.

Now, what the White House says, their claim is that the way to help the economy is to focus on businesses, that is the way to create new jobs. This is how they think it will help. It is, as you mentioned, 1.4 million new jobs. That's what they say their package will produce. An average of $1,083 for each American in terms a tax cut, and $1,384 in tax cuts for 13 million elderly Americans. Some of the -- part of the pitch here for that dividend that tax cut is that it helps elderly Americans. That's what they say at the White House, because that they feel they get most of the benefit from stocks that yield dividends.

Now, knowing Congress is not going to give him his full plan, the president, a couple of weeks ago, did lower the bar. He said he's not -- no longer even going to try for a $726 billion over 10 years, he's just going to try for the $550 billion figure.

The House is going for that. The House is saying, OK, that is the number we are going for, but the details, the White House found out late this past week, are very different -- or a little bit different from what the White House wanted. And it was a little bit of a blow to the folks here at the White House, particularly in the centerpiece of White House plan, and that is, the dividend elimination.

The House Ways and Means Committee, backed by the Republican leadership, is going for instead a full elimination simply a drop. A dramatic drop, but only a drop in the dividend taxes, and they're going to match that with a cut in the capital gains rate. That is something that the White House doesn't even want in the first place. They didn't have it in their plan.

CAFFERTY: Dana, thanks a lot. The president's tax proposal, I suppose, is like a pizza with anchovies, you either like it or you don't.

So, I bring in a couple of guests now. We are going to have a mini-debate over these weighty issues. "New York Times" op-ed columnist Paul Krugman joins us from Princeton, New Jersey. Mr. Krugman says the president's plan would actually destroy jobs.

Here in New York, Bear Stearns chief economist, John Ryding. He says Paul Krugman might need to double check his map.

Gentlemen, welcome. Mr. Krugman, take us out on this. You don't think that the tax cuts the president wants are going to create any jobs. Why not?

PAUL KRUGMAN, COLUMNIST, "THE NEW YORK TIMES": Because the direct effect is very small. Very little of this tax cut arrives in the hands of people who are likely to spend it. Very little of it arises in the next year or two when we actually might need some job creation.

And in order to sell the tax cut, the administration is shortchanging the things that might actually create jobs. And most spectacularly, it's refusing to provide any aid to state and local governments, which are cutting back sharply. So, if you look at the overall impact, this is a disastrous proposal.

CAFFERTY: John Ryding, it sounds like Mr. Krugman has a point. State and local governments are hurting big time, and there is precious little on the way of federal help on the way. Nevertheless you think the tax cuts are a good idea and might be just the prescription the economy needs. How so?

JOHN RYDING, BEAR STEARNS: Well, I think they are the prescription for a number of reasons. Firstly, I don't think it's a bad thing when you allow people who earn money to keep more of their own money.

Small-business owners pay high tax rates. This will lower the tax rate of what small-business owners pay and send them to create more jobs on.

On the issue of no stimulus now, the equity market would respond quite positively to the elimination of the double taxation of dividends. That would boost consumer wealth, and that would boost GDP through consumers' spending a percentage of that wealth.

And thirdly, on the issue of government spending, if you actually look at what's projected to happen in the budget, government spending rises quite rapidly over the next six years in the president's budget at more than twice the rate of inflation, some 5 percent per year with big increases in Medicare and Medicaid spending. So, quite frankly, I don't buy into the argument that the budget and the tax cut is short changing anybody, either on government spend or on tax stimulus.

LISOVICZ: Gentleman, Susan Lisovicz here. Can we just talk about a federal deficit. Does anybody care that this could get completely out of control? That it would call for higher federal debt payments, at the same time reduced savings. Doesn't that matter ultimately?

Well, I think first all, you have to remember where we are. We have a government debt to GDP ratio of about one-third. Back in 1995, it was around one-half. We have paid down a substantial amount of debt, and there's no problem if we run up some debt over the next few years in an attempt to get...

KRUGMAN: But, this is a permanent tax cut. Can I just say this? That's whole point. This is not a temporary stimulative tax cut. It's a permanent tax cut. It's intended -- it does very little for the economy now. It provides -- it saps revenue into the indefinite future. We are heading for the problem of the retiring baby boomers.

No, this is crazy. This is a tax cut that is being sold as exactly what it is not. It is, in fact, an attempt to starve the government of revenues later on when it needs them.

SERWER: Andy Serwer from "Fortune." How are you doing? I want to ask you about incentivizing or stimulating state and local governments. I mean, isn't the whole point here to stimulate the private sector? I mean, jobs come from businesses, not government, right?

KRUGMAN: No, jobs come from both. And look, what are we looking at right now are severe cutbacks in essential services at the state and local level. If you were talking about, you know -- if we were talking about something that would actually lead it an expansion of what state and local governments do, would actually lead them to take on new responsibilities, create new programs, then we could have a discussion.

But what's actually happening right now is we are cutting schools, firing teachers. We're cutting, you know, we're cutting road maintenance. We're cutting health care for the poor, especially for poor children.

All we are talking about now in the realm of the political discussion is whether the federal government should provide some aid to avoid the necessity of state governments doing that.

By the way, state governments are also now starting to raise taxes because they have no money. So, we have this bizarre situation in which people who receive lots of dividend income that isn't already tax sheltered, which basically means rich people, are getting a tax break at the same time that states are raising state taxes and closing schools and reducing health care for poor children. That's pretty amazing. CAFFERTY: What about -- Mr. Krugman, what about the elderly, who oftentimes rely on the few dollars they get in stock dividends to support Social Security?

KRUGMAN: That's a wonderful thing. The administration likes to say most of this tax break will go to the elderly, and it's true. Most multimillionaires are elderly. It turns out, however...


KRUGMAN: ... 70 percent of older Americans receive no taxable dividend income. OK? It turns out that among elderly Americans with incomes of less than $50,000 a year, a grand total of 4 percent of this will go to them.

CAFFERTY: Paul, what percentage of the entire population receives taxable dividend income?

KRUGMAN: It's certainly well under half. The bulk of this goes to people at the top. Remember, most people who have stocks have them in 401(k)s, which are already tax sheltered. So, this a tax break that only goes to people who have large amounts of dividend income, not into a 401(k).

CAFFERTY: John, what about that point? I mean, Bill Gates of Microsoft went out and declared a stock dividend within nanoseconds of the president uttering the phrase, "Let's kill tax on dividends." Because he could make $80 -- $90 million a year extra based on his stock ownership. I man, does Mr. Krugman have a good point here?

RYDING: No. I think we have to bear a number of points. First, dividends are extremely overtaxed. It takes $2.50 of pretaxed profits to pay $1 of dividends after...



CAFFERTY: The road to peace in the Middle East has been a long series of jolts, detours and dead ends. We're not there yet, and after decades of driving, the destination is still somewhere off over horizon.

This week the Bush administration unfolded a new road map, though, for peace between Israel and the Palestinians. Hours before U.S. officials delivered that plan, a suicide bomber blew himself up at a door to a Tel Aviv cafe, another reminder that there is, in fact, a long way to go.

For a look at where the U.S. road map may lead and whether Israel and the Palestinians are ready to go there, we are joined by CNN's Kelly Wallace who is in Jerusalem. Kelly, nice to have you with us. How is this thing playing so far over there? I understand it is still early.

KELLY WALLACE, CNN CORRESPONDENT: It is still early, Jack, and great to be with you.

I wish I had some better news to report because there's a great deal of skepticism in the region about this road map. Namely, because, as you mentioned, it's relief was procedured and followed by violence, the violence including that suicide bombing on Wednesday outside a Tel Aviv cafe that left three people dead. And it came just hours after the new Palestinian Prime Minister Mahmoud Abbas was confirmed by the Palestinian parliament.

Then a day later, in the Gaza Strip, a massive Israeli military operation left 13 Palestinians dead, including a two-year-old boy, and three members of the radical Palestinian group Hamas, one of the two groups claiming responsibility for that Wednesday suicide bombing.

Now the challenge for these diplomats is trying to make sure, in the words of Secretary of State Colin Powell, this violence does not contaminate the process of implementing the road map, which both sides received on Wednesday, Mahmoud Abbas getting his copy from international diplomats, including the U.N. envoy to the Middle East.

The road map is a three-year, three-phase plan that would ultimately lead to a democratic Palestinian state along side a secure Israel by 2005, but both sides will have to take steps that they have long resisted. The Palestinians would have to bring an end to all terror attacks. The Israelis would have to free settlement activity and pull out of Palestinian towns.

There are clearly political and security aspects to this road map, but there are also economic implication as well, because the Israeli economy has really been devastated by this violence. Tourism is way down. The government is preparing to enact major budget cuts.

And in the Palestinian territories, unemployment is at about 55 percent. The economic conditions have also been deteriorating by the violence.

And so, Jack, the big question now is, will this peace plan enjoy success, whereas so many others have failed before? And no one really knows the answer to that just yet.

LISOVICZ: And we've all been witnessed to that for so many years, Kelly. You know, we had this renunciation of violence just hours before that suicide bombing. The new Palestinian leadership, much hope and optimism for what they can bring. Has this damaged their credibility at all?

WALLACE: Well, the Israelis say yes. They say this was the first test of the new Palestinian government, and one adviser saying it's a quote, utter failure. Privately, Israeli officials are skeptical that Mahmoud Abbas will really be able to rein in these radical Palestinian groups, and that is because many Israelis believe Palestinian President Yasser Arafat is still trying to assert power behind the scenes.

The Palestinians would say, give them some time. Give the security team time get up and running, and they would also say, Susan, that the Israelis need to take some steps to pull out of these Palestinian towns and stop these military operations that the Palestinians say are increasing the anger and leading to more and more violence.

LISOVICZ: Kelly Wallace, good to see you. Thank you so much for your report.

Coming up, the business of peace. Will an end to the violence in the Middle East mean the start of an improved investment climate? We'll look at what peace between Israel and the Palestinians means for the global economy.

And while most of world is staying as far a way from China as possible, one of the globe's richest men is moving in. We'll tell you about Warren Buffett's latest move when IN THE MONEY continues.


CAFFERTY: When the United States rolled out its road map for peace in the Middle East this week, it offered a new path to try to end the very old problem. And when hopes for peace are raised in the region, hopes for prosperity rise, too. The economists believe that if violence ends in that part of world, whole new opportunities will open up for both Israelis and Palestinians.

And the benefits would not necessarily stop there. Some say Middle East peace would a boost for the economies around the world. For instance, imagine how much better off we'd all be if some day, we could live without the threat of terrorism.

Joining us now is a man who has been following the course of the Arab-Israeli peace negotiations for a number of years. Martin Indyk is the former U.S. ambassador to Israel and currently is the director of the Saban Center for the Middle East at the Brookings Institution. Mr. Indyk, nice to have you with us.


CAFFERTY: Based on your knowledge of the history of the area and the parties involved, is this latest road map perhaps the long-sought solution? Can it work?

INDYK: We'll have to see. I think the jury's still out on it. Obviously, the conflict over the last two years has created a great deal of hatred and mistrust. The terrorist organizations are still out there determined to thwart the road map itself.

And Abu Mazen, the new Palestinian prime minister, is -- has to deal with not only that problem of the terrorists, but and also Yasser Arafat, who doesn't want him to succeed.

So, it's a question of whether Abu Mazen and Ariel Sharon, the Israeli prime minister, and George Bush together to have the will to overcome the significant odds. But there's a better opportunity now than there has been a long time, partly because of the war in Iraq, which has advantaged us and given us more influence, partly because of the exhaustion mainly from economic factors on both the Palestinian and Israeli sides.

SERWER: Martin, Israel is one of the United States biggest trading partners. Is it appropriate to use economic incentives to move this ball?

INDYK: Well, it's -- economic incentives can be helpful to both sides in these circumstances in terms of the fact that their economies are hurting very badly. You've got on the Palestinian side of a 70 percent of Gazans under the poverty line, and 50 percent of the West Bank is under the poverty line. In Israel, surprisingly enough, one in five Israelis is now under the poverty line.

So, if you are talking about positive incentives, yes, indeed. I think that the supplemental that was just passed from the Iraq war has some strong incentives for Israel in terms of some $9 billion in loan guarantees that would provide for investment, particularly an infrastructure, in the Israeli economy that can help and plus $50 million in direct assistance for the Palestinians that could help on that side.

So, yes, economic incentives can help as long as they are wedded to a political initiative that has the backing and the full faith and support of the President of United States.

LISOVICZ: Mr. Indyk, to get this done for the Palestinians to have their own state, presumably, there would have to be a cease fire. Israel would have to remove itself from Palestinian settlements, but then again there's this fear that the Palestinian terrorists would have a chance to rebuild.

How deep is the distrust? Is there a sense that perhaps a third party should come in since there's so many parties that are already involved in this -- in these negotiations between the U.N., Russia, and the U.S. and the European Union?

INDYK: Yes, let me just clarify one thing. Israel is now in occupation of Palestinian cities and towns to try to stop the terrorists. The arrangements of the road map require that the Palestinian authority stop the terrorism and violence and the Israelis pull their army out, and in that way, you create a better situation for negotiations.

As to the role of third parties, there's only one third party that can make a difference, and that is the United States. And that's because the United States enjoys the trust of Israel.

Israel is the one that has to take the actions that make other things possible beyond the Palestinian's fighting the terrorism. They've got to take the risk of pulling their army out, the risk being the terrorists will reconstitute themselves and find it easier once the Israeli army is out of those town and cities to attack Israelis again.

So, the United States, which has a very strong and close relationship and friendship with Israel, can help in that process, can minimize Israel's risks, and it has the trust of Palestinians as well. The Europeans do not, the United Nations do not share that same unique role.

Why does the United States have to do it? Because the parties themselves have been so engaged in such a bloody conflict, there is so much hatred and distrust, that they do not trust in the other's actions. And only the United States can come in and, in a sense, hold their hands and walk them out of this abyss that they have dragged themselves into.

CAFFERTY: To what degree is Ariel Sharon's willingness to cooperate key to this whole thing? And that sound leaks a very simplistic question, but I mean it in this context. When the road map was given to both sides, Palestinian Prime Minister Abbas looked at it and said this is terrific, we agree with this, let's move forward. Ariel Sharon's people looked at it, said, well, we want a dozen changes to start with in the plan before anybody really had a chance to take too close a look at it.

To what degree is the United States in a position to insist that Ariel Sharon cooperate, perhaps more than early on he is indicating that he's willing to in these negotiations?

INDYK: Yes, I think that...


SERWER: The SARS isn't enough to frighten the oracle of Omaha. Billionaire investor Warren Buffett's Berkshire Hathaway reportedly just put about $100 million into the Chinese oil exploration firm PetroChina. It's just the latest against the grain move from Mr. Buffett. But once he makes these moves, there are thousands of investors who usually follow him, and speaking of creating a following, Berkshire Hathaway is holding its annual meeting this weekend. It's an event some like to call corporate Woodstock, where Buffett's faithful followers gather in Omaha to hear his words of wisdom. So Berkshire Hathaway is our stock of the week.

So, what do you think, guys? Everyone is running away from China, and there he is, the contrarian going in and making a big investment.

CAFFERTY: Susan and I were working together at CNNfn back when the phrase "new paradigm" was all the rage. Remember that?


CAFFERTY: That was Nasdaq 5,000.

LISOVICZ: A lot of us bought into it.

CAFFERTY: And everyone was buying tech stocks, and Mr. Buffett said, you know, I don't really understand this technology.

SERWER: Yes, and I won't buy them.

CAFFERTY: And don't see where there is a lot of value there. So, I'm just going to stay away from that. And, I mean, he got laughed at. He was, you know, they were telling jokes on "Letterman" about him and what a dope he was and stuff.

LISOVICZ: And he's had the last laugh. And that's why they call him...

CAFFERTY: Guess whose 401(k) is still what it was before then?

LISOVICZ: And what are his shares selling for? Berkshire Hathaway, a share, $70,000 a share.

SERWER: Or the B ones, they are cheap, only $2,300. I mean, what's interesting to me, this is an economy -- leave aside SARS because it will probably get figured out at some point -- this is the fastest growing economy in the world. What better way...

CAFFERTY: You're talking about China.

SERWER: China. What better way to play the fundamentals than buy the biggest oil company and just go along for the ride.

CAFFERTY: And just wait to see what happens as the economy continues to grow.

LISOVICZ: And even with the inevitable hit that SARS will take on China, some economists are saying it will still grow at 5.9 percent a year.

SERWER: We'd kill for that, right?


LISOVICZ: ... less than 2 percent.

SERWER: And the annual meetings he has are a lot of fun. People are eating ice cream and playing baseball, and he sits there very patiently and takes hour after hour after hour of questions.

LISOVICZ: And pictures, right?

SERWER: Yes. Pictures. The whole thing.

LISOVICZ: Myron Kandel plays tennis with him.

CAFFERTY: Yes. There won't be any press people out there in Omaha either, right?

SERWER: Not covering this thing.

CAFFERTY: Are you going?

SERWER: No, I'm not going.

CAFFERTY: Oh. OK. Somebody from "Fortune" will be there though?

SERWER: Oh, yes. They will. CAFFERTY: All right, coming up as we continue IN THE MONEY, off the wall. We'll tell you how some paintings, valuable ones from a British art gallery, wound up in the last place you'd look for a masterpiece, in a manner of speaking.

And if you like what we are doing or think we could do it better ---if you like what we're doing, e-mail us. If you think we can do it better, I don't want to talk to you. We are doing the best that we can do here, boys and girls. We are.


CAFFERTY: Just a reminder, we like to hear from you. You can send us your e-mail, the good, the bad and the ugly. The address is

Here's one. Police in England trying to figure out if a multimillion dollar art theft was the work of some clumsy criminals or some activists with an axe to grind. The cops in Manchester discovered three priceless paintings, Picasso, Gauguin, and Van Gogh, in a public toilet.

They were found not far from the art gallery where they were stolen. Police found a message near the paintings say the thieves did not intend to keep the art, just wanted to show how woeful the gallery's security was.

The local chief inspector says he's not impressed and intends to pursue a criminal investigation against those responsible. Go figure.

LISOVICZ: Go figure.

SERWER: You see people do this airport and planes sometimes. I just want to show you your security's no good, so I brought a knife on the plane.


SERWER: You know what happens to those people?

LISOVICZ: Yes, but then you have somebody who doesn't like, say, Picasso Picasso's blue period, and then they take a knife to it. So...

CAFFERTY: The other thing is you can see artworks in bathrooms even far away from art galleries.

SERWER: Yes, they draw on the walls sometimes?

CAFFERTY: Yes, in the stalls. You see...

LISOVICZ: It's called graffiti.

SERWER: Maybe it was some of the soccer fans. You know, Manchester.

CAFFERTY: Could be. Hooligans. They call them hooligans.

SERWER: Soccer hooligans. Football hooligans. That's right.

CAFFERTY: Mercifully, that's all time that we have for today.

This week on CNN, we are focusing on the job market and how some recently, and not so recently, unemployed Americans are doing in their quest to get pack to work. Watch our special series, "Help Wanted, Jobless in America".

And my thanks to "Fortune" magazine editor-at-large, Andy Serwer, and my old pal, Susan Lisovicz, from CNN Financial News. We will see you next weekend.


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