Economic Update

March 18, 2009

Transcript:

Ted Simons:
Housing starts were up last month and retail sales are showing a bit of stability but unemployment is at a 26-year high. Federal reserve Chairman Ben Bernanke says he thinks the recession could end this year. Here to give us an update on the economy is Dennis Hoffman, an Arizona State University economist. Dennis, always a pleasure. Thanks for joining us.

Dennis Hoffman:
Ted, good to see you.

Ted Simons:
Has the economy hit bottom yet? And if so, if not, I mean, how are we going to know it's hit bottom?

Dennis Hoffman:
Well, mixed signals right now. Maybe a little signs of life here and there. If you watch daily data, the things that worry me continue to be lackluster withholdings collections. That's a sign that people's incomes haven't rebounded and there's not enough people working. Retail sales still pretty, pretty bad, automobile sales just horrible. But maybe a little bit of stability in housing. Kind of tough to sort it out because historically we have never had this kind of foreclosure rate but in terms of housing turnover a little bit numbers. Maybe -- I wouldn't say stability in price but we are frying to find this mucky bottom kind of thing bouncing along here. What we have got to do is we have got to see some numbers in terms of retail sales transactions that stabilize a bit in the economy. Then we will know that things are getting a little bit better.

Ted Simons:
Are there indications that banks are starting to loosen up?

Dennis Hoffman:
Well, I think there's a lot of pressure on the banking community to certainly loosen up and insurance community, the A.I.G. boys are taking it pretty hard with bonuses. And, in fact, frankly that's a complex story. But I think that there is a lot of pressure on the financial community to loosen up lending standards. The fed made another massive injection today. That should help housing. So, you know, I think there's reason to hope. So if Bernanke says there's a chance by the end of the year or next looks to me like he's willing to put the fire power behind it to get there.

Ted Simons:
We are seeing stocks doing relatively well here the last week or so. First of all, why? And secondarily, will it be sustained?

Dennis Hoffman:
Right.

Ted Simons:
Do you think it might be sustained?

Dennis Hoffman:
Another great stock tip for you. Buy two weeks ago. That's when you need to buy. Will it sustain? The adage in markets, it's a bear market down more than 20%. Well more than 20%. And so people talk about a dead cat bounce in a bear market. In other words, is this just a fake rally and it will continue to slide? You know, a number of us are hopeful that, you know, this is, again, I am not saying stocks are going to go straight up from here. That's unlikely. But people are suggesting that, you know, maybe equities are trying to find bottom here. Investors are trying to regain confidence. Ted, this is all about confidence. It starts with the consumer or starts with the investor or starts with a business. You can't tell where it starts. It's all a big bundle.

Ted Simons:
Let's talk about confidence and back to A.I.G. and these retention contracts and the controversy therein. People are upset about this. They are awfully angry over these things. Can that anger that upset itself affect the economy?

Dennis Hoffman:
Sure, it can. I think the media buzz around this, you know, one of the unfortunate things about the debacle in the credit markets last fall is that it took place during 24-hour news cycle, presidential campaign period. So it was all people got all whipped up with the announcements on this. If you look at A.I.G., some thieves' bonuses are on contract to try to retain people that are trying to work through these bad assets. The people that made the bad bets are gone. The people that committed most of the egregious problems at A.I.G. are out of there. So they are trying to hold on to people who are actually working at eliminating their own jobs because once they get this all worked off, there's no demand for them. So how do you retain these guys, you know, while you are at it? Well, what did we do? We made them all sound like, you know, the evil incarnate.

Ted Simons:
When you had that kind of infusion of money from the federal government, it's not bankruptcy; it's kind of a different form of takeover.

Dennis Hoffman:
Absolutely.

Ted Simons:
It does seem like all bets are off including a lot of contracts, doesn't it?

Dennis Hoffman:
Absolutely, absolutely.

Ted Simons:
Let's go to Arizona real quickly here. There's a lot of talk about a temporary sales tax, a temporary income tax increase, something along these lines to get money, $1 billion that the governor wants to see into the state for two, three years, something along these lines. From an economic standpoint, does that make sense?

Dennis Hoffman:
Actually, I think it does. Let me kind of put some parameters around this. The hole is huge. I have a lot of compassion for policymakers now down there that are trying to confront this huge problem. Let's call it a $3 billion problem. So the governor is saying, hey, let's temporarily trying to deal with some of that problem through revenue enhancement. Why not? You got to turn to every option that you can. You cannot, I have said repeatedly, you cannot cut your way out of this problem nor can you completely tax your way out of this problem. I think all options need to be on the table and I think it was a bold move. Arguably the move of a leader to stand up in front of people and say, look, we have got to consider all of these options now and maybe taxes need to be on the table.

Ted Simons:
Critics, say, however, a recession is the worst time to institute a tax or raise taxes, whatever. Are they wrong?

Dennis Hoffman:
History time, today, 1990, 1991, last time we did it, major recession. The end of a long down turn in housing, policymakers said, look, enough is enough. We got to fix this fiscal situation. Back then they fixed the fiscal situation and they raised taxes. What happened? Five of the strongest growth years this state has ever seen.

Ted Simons:
Then where does that idea that a recession is the worst time to raise taxes. Where does that come from? Where is it grounded?

Dennis Hoffman:
Well, look. Taxes by themselves are leakage from the spending stream. OK. Taxes are a leakage, they are a negative certainly. But you have to consider the counter factual. What is the alternative? The alternative is massive cuts and actually there's a lot of economics that suggest the cuts actually, on the margin, are worse for the economy than modest tax increases would be. So what I am arguing is that taxes, small taxes on the margin, fixing this fiscal situation, by taking tax rates and dialing them back to the say mid '90s level, by the way, if we had mid '90s tax levels, we wouldn't have tax cuts.

Ted Simons:
They may have led to something we have right now. We got about 30 seconds left. I want you to answer me this.

Dennis Hoffman:
Go ahead. I will take it straight on.

Ted Simons:
30 seconds. Better a sales tax or an increase in income tax?

Dennis Hoffman:
Well, I think you need to consider, I think you need to consider both. I think that consumption based taxes likes sales taxes may be the least distortionary although I worry a little bit about our base. Our income tax rates are really, really low. Hey, maybe a flat tax. Maybe we ought to be thinking about innovative kind of ways to structure an income tax.

Ted Simons:
All right. We will stop you right there. Dennis thanks so much for joining us.

Dennis Hoffman:
Great to be here, Ted.