Radio Workshop

The Cost of War (Transcript)

by Laura Santini

Karl: Well it was a surprise given he was so adamant about keeping the deficits under control. He was pretty supportive the last time around for Bush's tax cuts and this was a big change from some earlier statements he had made. I certainly think the economy could benefit from more spending this year or tax cuts and that would probably be an appropriate timing, but it's the permanent nature of these tax cuts. If they were temporary, and they provided some short-term stimulus, then we're in much better shape long-run on the deficits and social security...and paying for that in the future and those kinds of things...and those kinds of things. But this is a big package over ten years and making permanent some other tax cuts.

Santini: Are you concerned about inflation?

Karl: No.

Santini: How about deflation?

Karl: No....Inflation...The main concern about inflation is really just oil prices, and I think oil prices will be coming down later this year. I believe the Venezuela situation is going to be resolved six to eight months from now...though this is anybody's guess, in some sense....and the way the administration is going on the Iraqi situation is that that will be resolved in a couple months, so that's...and it may be Hussein leaves, it may be war action, but I think it'll be resolved in a couple months. Then oil prices will come down, relieving any concern about inflation potential.

On the deflation side, probably two-thirds of the economy is private sector services and services' inflation is ongoing, and it's just way larger than the goods infl...deflation that we have, and as a consequence, I don't see a lot of probability for overall deflation.

Santini: What about growth in the overall economy? Are you expecting the economy to grow faster this year than last year?

Karl: Yes, I'm seeing a gradual acceleration in growth. A couple key factors there: first, we saw a little bit of it in the January employment report--but that was a lot of special factors--but we should be seeing employment gains this year, which will mean a big difference for consumer spending, and that will accelarate into next year and have a strong growth next year.

The second factor is that business investment is coming back, and it will get stronger this year and stronger again next year. Don't expect a lot of growth from housing...it's at a high level now...or from auto sales. But consumer spending on other durables...and...nondurables and services will be strong.

Santini: What about Greenspan's disagreement over long-term deficits though. Do you think if Bush's proposed tax cuts go through, that Greenspan will keep interest rates low, or do you think he will start to ratchet them up?

Karl: Greenspan's main task is to keep inflation in control...and deficit spending is inflationary...there's just no way around it. And as a consequence, I think you'll see the Fed leaning against the fiscal action and that's a problem for the intra-sensitive sectors of the economy, like housing, business investment and auto sales.