FTN - 1/6/02

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BOB SCHIEFFER, Chief Washington Correspondent: Today on Face the Nation, does the economy need a jump-start and what kind?

It's Bush versus Daschle. In a biting speech last week, the Senate majority leader, Tom Daschle, blamed the current recession on President Bush's big taxes. President Bush replied and said Democrats want to raise taxes, and that they will reverse his tax cuts "over my dead body."

The war over the economy has begun. We'll get both sides from the president's chief economic adviser, Larry Lindsey, and Robert Rubin, who was president Clinton's treasury secretary.

We'll get the Wall Street view from Abby Joseph Cohen of Goldman Sachs, and talk about the ongoing war on terrorism and more with New York Times columnist Tom Friedman.

Gloria Borger is here, and I'll have a final word on last year. But first, the tax cut fight on Face the Nation.

And good morning again.

We start this morning with the White House economic adviser, Lawrence Lindsey, who is with us here in the studio in Washington. In New York, former Treasury Secretary Robert Rubin.

Mr. Lindsey, I'm going to start with what President Bush said yesterday. He was out in California, pushing for what he now calls an economic security plan. And here's one of the things that he said.

(BEGIN VIDEO CLIP)

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: Not over my dead body, will they raise your taxes.

(APPLAUSE)

(END VIDEO CLIP)

SCHIEFFER: The president saying, not over his dead body would they raise taxes. I guess my question is who is "they"?

LAWRENCE LINDSEY, White House Economic Adviser: Well, Senator Daschle's proposal that he laid out Friday was a call for tax increase. He called for...

SCHIEFFER: Excuse me, that's simply not true.

LINDSEY: No. He called for significant increases in spending, for homeland security, for investments in research and development. He would double civilian research, for example--cost of $200 billion over the next 10 years.

He had a wide variety of programs. The only way that you could finance those was tax increases. It's as simple as that. So that's what the president was responding to.

SCHIEFFER: Well, there are several things within Mr. Daschle's program that I don't particularly agree with, but I would again challenge you on saying that he called for a tax increase.

LINDSEY: Well, not only did Mr. Daschle call for huge increases in spending, but he also said that the tax cut was a mistake. Well, if the tax cut was a mistake, then what he's calling for is reversal of it, I assume.

GLORIA BORGER, U.S. News & World Report: Well, but nobody specifically--I mean, did Senator Daschle, in your view, come out specifically for asking for a repeal of this trillion-dollar tax cut or even a postponement of it?

LINDSEY: Well, if he goes out there and says, as explicitly as he did-and I don't agree with him, of course--but he said, pretty explicitly, this is a mistake. You know, if he is true to that line of reasoning, then I would think that he'd be for repealing it.

SCHIEFFER: But you're playing with words here. I again...

LINDSEY: No...

SCHIEFFER: ... go back to what Senator Daschle said. There is nothing in his speech that calls for a tax cut. Now, it's one thing to say you can't pay for what he is proposing without raising taxes, but that's not saying let's have a tax increase.

LINDSEY: Well, no, he said that he was for all of these extra spending programs, and he also alleged that he was for fiscal responsibility. There's something called adding up. And the only way it adds up is to have a tax increase. So I think a very fair reading of what Mr. Daschle called for was increasing taxes. And it's the wrong thing to do for this economy.

The tax cut, when it came in June, was attributed by most private-sector economists as the best-timed tax cut we've had; that, absent 9-11, we would have avoided the recession altogether, thanks to the tax cut.

And to say that now that the economy is just perhaps getting its legs under it, that we should have a tax increase in big spending programs, I think it's a serious mistake.

BORGER: Well, let's talk a little bit about stimulus package then. You say that the economy may be getting its legs now. You have proposed a long-term economic recovery package. Senator Daschle proposed what he calls a short-term recovery package. Yet, the president seemed to indicate before Christmas that we may not need an stimulus program.

So what is it? Do we need one or don't we?

LINDSEY: I think that key here is a matter of probability and a matter of timing.

All the preconditions are there for the economy to recover this year. But we still have some downside risks. The rest of the world is in terrible economic conditions. We still have too many people unemployed.

Given that, it would make sense to me that we take out an insurance policy with the package that the president outlined on October 5.

Same thing is true with timing. You know, if you're unemployed right now and you're told, well, the economy will recover sooner or later, you're not indifferent between sooner or later.

You want sooner, not later.

And so the package the president laid out three months ago, or, as he said, 950,000 jobs ago, was one that would protect people who are unemployed as well as providing stimulus so that we can create paychecks and not just unemployment checks.

BORGER: Well, are you saying that if it were not for Tom Daschle and the Senate Democrats that those 950,000 people would be in better shape?

LINDSEY: One thing they would have for sure is they would have an extra 13 weeks of unemployment comp. They would also have COBRA protection for their health insurance.

The president's plan that he laid ut called for covering 60 percent of the health insurance costs of those people who are unemployed as a result of the recent events.

I think that, yes, it's pretty clear. If that package had passed, those people would be better off as a result.

SCHIEFFER: Is it fair to say that the administration has begun the campaign to keep the Republican control of the House in the 2002 elections and that's what this is all about?

LINDSEY: No, what this is all about is doing the nation's business.

Let's look at what was pending. We had an economic stimulus bill that passed the House; that had majority support in the Senate that wasn't brought to a vote.

We have a terrorism insurance bill that passed the House, that we had worked very closely with Senator Sarbanes on, that was not allowed to be marked up in the committee.

We had an energy bill that had majority support in committee in the Senate that passed the House that was never brought to the floor.

Trade promotion authority passed the House, had a big mark-up in committee, was never brought to the floor.

What we're talking about is doing the nation's business. These are things that are natural results of what happened on 9-11 that are necessary to make sure this economy runs well. And the president wanted them done last year. They still have to be done.

Just the fact that the year has changed doesn't mean that we can continue to this delay.

SCHIEFFER: All right.

That's one side of the story. Now we're going to get the other side of the story. We are going to talk to Robert Rubin, who, of course, was the secretary of the treasury during the Clinton administration.

You just heard Mr. Lindsey, Mr. Rubin. He talked about how when you say you're for--that not being for cutting taxes is like calling for a tax increase. And I want to ask you about that, because I think there was some rhetorical overload in Senator Daschle's speech as well.

And that is, he accused the president and the Republicans of causing what he called, quote, "the most dramatic fiscal deterioration in our nation's history." Now, some people over at the White House are saying, "Well, what about the Great Depression?"

Wasn't that a bit of an overstatement too?

ROBERT RUBIN, Former Treasury Secretary: Well, Bob, the reality is that over the past seven months, the projected fiscal position of the United States government with respect to the next 10 years has diminished enormously. The surplus was projected seven months ago at being $5.6 trillion, the surplus for the next 10 years. It's now projected, according to an article on the front page of the New York Times today as being under $2 trillion.

And the reality is that the tax cut that was passed last May has made a major contribution to that deterioration.

In August, the non-partisan Congressional Budget Office put out a report saying that that tax cut reduced, reduced the surplus by $1.7 trillionwhich is about half of the deterioration that is now projected to have occurred over the next 10 years and about 70 percent of the deterioration that is projected for the last several years of that 10 years.

And that is enormously adverse with respect to economic conditions in the long run, and I believe it is having an adverse impact now.

SCHIEFFER: Well, it sounds to me like that both sides are just playing politics with this issue, Mr. Secretary.

RUBIN: Bob, I don't agree with that at all. We had eight years of remarkable economic conditions beginning in 1993. And that was based--there were many factors that contributed, but key and indispensable was a restoration of fiscal discipline.

And what Senator Daschle was saying was that we must continue on that path for the long term while in the--and that, as a consequence, those who created that tax cut that has contributed so greatly to deterioration need to repair the damage. And at the same time--at the same time that he is deeply committed to putting in place an effective stimulus for the short term.

BORGER: So, Mr. Rubin, now that you're not involved in politics in Washington, can you tell us whether you would like to see this tax cut either repealed, part of it, or delayed?

RUBIN: Gloria, I wouldn't go at it that way. I think the tax cut was unwise. I think it was unsound. Time has proven that to be the case. It has made a major contribution to the fiscal deterioration which has occurred.

But I do believe that it is correct that the people who are responsible for the tax cut that has so greatly damaged our fiscal position should take responsible for repairing the damage.

BORGER: So do you think it's fair for some Democrats to be calling this the Bush recession?

RUBIN: I think what happened is that you had eight remarkable years, Gloria, beginning in 1993, and I do believe that the restoration of fiscal discipline, as I said a moment ago, was central to that.

As has always been the case when you have long, extended periods of good times, there is a slowdown that follows, and that's what we had.

But then the real question is, what do you do about the slowdown? And what you do about it has a lot of effect on what happens next.

And what president--what the administration decided to do was to put in place a very large tax cut. If you look at interest rates over the course of last year, market interest rates, they have basically not come down, five-year and 10-year government rates.

Fixed rate mortgages rates did not come down last year. They came down versus two years ago, but they did not come down over the course of last year. And I believe one factor responsible for that was the enormous deterioration in our fiscal position over time over the next 10 years.

SCHIEFFER: What about Mr. Lindsey's assertion that what Senator Daschle is really saying is, let's raise taxes?

RUBIN: That s not what Senator Daschle said. What Senator Daschle said is that a very large tax cut was unwise and unsound, has contributed enormously to the deterioration of the nation's fiscal position, an immense deterioration and a dramatic deterioration over the next--now projected for the next 10 years. And that the people who are responsible for the tax cut that contributed so greatly to that should take responsibility for fixing the damage that was done.

SCHIEFFER: What about the president's assertion yesterday that taxes will be raised over his dead body, regardless of whether somebody's proposed that or not?

RUBIN: Well, I don't--wouldn't frame the issue that way, Bob. I would frame the issue, what is best for our economy going forward?

And what Senator Daschle said the other day was there are really two things we need to do: We need to repair the enormous damage that's been done to the long-term fiscal position of the country, and secondly, we need to put in place an effective--and I emphasize effective--stimulus program.

He has proposed the effective stimulus program, along with Senator Baucus, the chairman of the Senate Finance Committee, while at the same time the nonpartisan Congressional Budget Office issued a report the other day saying that the bill that passed the House was in large measure, and very large measure as a matter of fact, not an effective stimulus package.

And in fact, that package could even do harm because it increases--it has costs in the outer years that could increase the deterioration of our fiscal position.

BORGER: Mr. Rubin, do you think this economy is actually starting to turn around on its own?

RUBIN: Gloria, I think--I've been around markets and economic issues all of my adult life. I think economic prognostication is exceedingly difficult. Most forecasters think we will have--we will get back to economic health by the middle of the year, but I agree with something Larry Lindsey said. I think there are a lot of uncertainties, and therefore there are certainly other scenarios that are more difficult.

And I agree with Senator Daschle. I think that we should enact an effective--and I emphasize effective--stimulus program, but it's got has to be one that will work. And that's what Senator Daschle has proposed.

SCHIEFFER: All right. Well, thank you very much, Mr. Rubin, and thank you, Mr. Lindsey. We certainly got two sides of a very complicated and clearly an important question.

We'll be back in a minute with our roundtable discussion.

(COMMERCIAL BREAK)

SCHIEFFER: With us any from New York, Abby Joseph Cohen of Goldman Sachs; here is our studio, Tom Friedman of the New York Times, for a little roundtable.

Abby Joseph Cohen, let me go to you first. We're hearing all this back and forth about these macroeconomics and grand plans and all of that.

If I'm just an investor out there watching this broadcast this morningwhat should I be thinking about? Should I be thinking about getting into the market, getting out of the market? What do you see down the road here?

ABBY JOSEPH COHEN, Goldman, Sachs & Co.: Well, the time to have gotten into the market was when everyone was really nervous at the end of September. You may recall that on the 24th of September, we suggested to our clients that they buy stocks. Stock prices are up 20 percent, but that's history.

What we think matters going forward is that the economy in the United States is likely to improve. The data will be fitful, the progress will be slow, but we think over the intermediate and long term this is a very strong economy, the world's most productive workers. And we think that financial markets will generate good returns, not the very large returns that we became accustomed to at the end of the 1990s, but returns that are commensurate with the improvement of the economy and corporate profits.

SCHIEFFER: Tom Friedman, give me the political side of what you've just heard this morning. Are both sides now playing politics? Are both sides overstating it, or--there obviously are some real differences here. But how do you see what you heard this morning?

TOM FRIEDMAN, New York Times: What I heard this morning was politics as usual, Bob. And I find that very deflating, very deflating after September 11, when we all believed the world was a different place.

You know, it seems to me that September 11 we've seen generate so much energy in the public, positive energy, which came out in a billion dollars in voluntary donations. Energy for volunteerism, energy of bipartisanship.

And what strikes me most of all is tax cut, not a tax cut. He said it was a tax, not a tax. He's in my sandbox; he's not. It is so small compared to what I sense is the public mood out there, which is people want to be mobilized. They want to be mobilized for something that will renew and transform this country--what I've called for, a Manhattan Project for energy independence.

They want to be mobilized for something large so that when we look back on September 11 we aren't left with just some cockamamie tax cut and the sense that we have to wait longer at the airport.

BORGER: Abby Cohen, how does Wall Street respond to what Tom is talking about, sort of this reversion to business as usual, politics as usual, arguing over, if you will, smaller things rather than grander things that we have been talking about over the last few months?

COHEN: I think Mr. Rubin said it very well just a few minutes ago. Intermediate interest rates in the United States have not declined in recent months even though the Federal Reserve has pushed short-term interest rates dramatically lower.

And the reason is that many investors are concerned about the long-term implications of the change in fiscal policy. Many investors believe that it is impossible to forecast budget deficits or surpluse five to 10 years out. And the very large tax cut that was implemented just a few months ago really puts us towards the edge of, will we be losing all of the surplus that we might have enjoyed?

SCHIEFFER: Tom, what do you see ahead for the war? It's been going very, very well, but now we find that Mohammed Omar is still at large, Osama bin Laden is still at large. But some people are suggesting, perhaps, and I want to emphasize that I'm not one of them, that maybe it's over, maybe we've done our work there.

FRIEDMAN: Well, it's not over at all, Bob.

One reason we had September 11 was because we had attacks on marines in Saudi Arabia. We had attacks on our embassies in Africa. And you know what? We never really responded. We never really retaliated. We rattled, boy, our saber, but we never got at the people who did this.

This war is not over until Osama bin Laden, Mullah Omar and all their sidekicks are dead, OK. Because unless we send the signal that those of you out there who send other young men to commit suicide against Americans, unless we send a signal that do you that and you've committed suicide yourself and we will send Marines to every cave in Afghanistan to find you if we have to, this war is not over.

And I think it would be very dangerous to say, well, we've done our best. We don't know where they are. Let's just forget about it now.

BORGER: Ms. Cohen, what are the different kinds of questions that Wall Street analysts ask each other when predicting the economy now that we're in the middle of a war? Do they talk, for example, about the impact of another terrorist attack and what that would do to the national economy? How has that conversation changed?

COHEN: The conversation, of course, was dramatically affected after September 11.

But we are not yet back to business as usual because there are discussions about the impact, for example, on specific industries--airlines, insurance and so on.

But the real impact, we think, is on the overall economy where investors and business decision-makers are themselves taking a somewhat more conservative approach. Let's call that risk averse.

And when decision-makers are not quite so comfortable about the future, they're not quite so likely to go out and hire new workers, to rebuild inventories and to do capital spending.

We think the longer time we have without another major terrorist attack in the United States, the more likely it is that we will see decision-makers going back to doing what they know how best to do, and that is to put their capital to work by hiring new workers and by building new capital stock in the United States.

SCHIEFFER: I would just add we've just been given a wire service story out of India that says India shoots down an unmanned Pakistani spy plane, according to military officials. No more details on that as yet.

But it does illustrate, does it not, Tom, that while we in America are prtty much focused on Afghanistan, that this tension between India and Pakistan goes on. I can't think of how many times over the last five years people have said to me, you know, it's not going to be in the Middle East. That's not the real tension point. It's going to be between India and Pakistan, and we say, oh, yes, that's right and then we go on to something else.

But we're really now beginning to see just how volatile and how dangerous that border really is.

FRIEDMAN: You know, Bob, 10 years ago I was in Nantucket in a souvenir shop, and I bought a souvenir that I had to have. It was a clock that had six sticks of dynamite attached to it. It's a bookend. And I thought, well, given my history, that's the kind of bookend I need.

When I think of the war right now in Afghanistan, it's got two of those bookends on each end. One's called the Arab-Israeli conflict and the other's called India-Pakistan.

Kashmir, what India and Pakistan are fighting over; is the most dangerous place in the world now because both of them have nuclear weapons. You have two very fragile governments--India less fragile because it's a democracy, but certainly Pakistan very fragile.

And at a moment's notice, you could get handed a wire that says these guys have begun a land war against each other. They fought several over the last four decades and it's very likely they will again.

Pakistan would then have to move its troops away from the Afghan border, where they're now looking for Mullah Omar. That would create enormous complications for us.

You know, there's a lot of people who believe maybe Osama's hiding under a rock somewhere waiting for this Pakistan government to fall and then emerge full-blown. There are plenty of his supporters in this government, and, you know, it's a crazy scenario, but God knows anything is possible.

SCHIEFFER: Do you really think it's possible that India or Pakistan would actually detonate a nuclear weapon because of this?

FRIEDMAN: I don't think so as we sit here today. They both clearly understand the implications. They're both clearly trying to pull back from the brink.

But let's remember something. India had its own September 11. They had terrorists come into their Parliament, shoot up their Parliament with a lot of their cabinet present. These guys, had they succeeded, could have wiped out the Indian cabinet, part of it at least.

And so, we can't underestimate how seriously the Indians take this.

SCHIEFFER: All right. We have to leave it there.

Abby Joseph Cohen, thank you very much.

Tom Friedman, thanks to you too.

Back with a final word in just a minute.

(COMMERCIAL BREAK)

SCHIEFFER: Finally today, as the new year turned, I wondered what had was on my mind a year ago, so I looked up some of the stories I wrote back then. Mostly, they were about the long and strange presidential campaign.

What I didn't write about was foreigpolicy, and I certainly didn't write about terrorism. After all, it was a campaign year. And during presidential campaigns, we tell foreign policy to go sit in the corner and be quiet so we can all concentrate on issues that, quote, "touch people's lives"--or that's what we tell ourselves.

Frankly, I have a hard time remembering now what we talked about during campaign 2000. I remember John McCain was talking about campaign reform early on, but then he left.

George Bush talked about reform with results, and Al Gore kept talking about that lockbox.

And there were competing plans about how we would spend that big surplus. Remember the big surplus?

In the press, we talked about candidates staying on message, but we didn't pay much attention to what the message was.

Sure, the campaign was about who could raise the most money, but that's old news.

What I find so striking a year later is just how irrelevant all of it was. Virtually, nothing said in campaign 2000 was a predictor or a precursor of what would happen in 2001, nor did anything in that campaign really prepare us, or the new president, for what he would have to deal with.

Campaign 2000 did its primary job. It produced a new president, if just barely. But the rest of it was pretty much a waste. That's the fault of both parties and the press.

Well, that's it for us. We'll see you here next week on Face the Nation.



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