ROBERT MacNEIL: Good evening. Wall Street, which celebrated Ronald Reagan`s election victory with a binge of buying has had two days of sobering up. Today and yesterday share prices fell, in response to fresh signs of the economic realities the incoming Reagan administration will face. With leading banks raising their prime interest rates yesterday, and today fresh government figures showing inflation and unemployment still rising. So. although the government says there are signs of a gradual recovery, the economic factors that helped defeat President Carter will not disappear magically with Mr. Reagan`s election. In fact, the experts are split over the prospects. Some are arguing that Mr. Reagan`s huge mandate and strength in Congress give him a better chance than Mr. Carter had of solving these problems. Others, like liberal economist John Kenneth Galbraith. believe things will change little. The Wall Street Journal quoted Galbraith as saying, that `prospects aren`t much brighter now, unless, as is now widely held. God is a conservative.` Tonight economic prospects under Reagan, and how quickly his influence will be felt. Jim Lehrer is off. Charlayne Hunter-Gault`s in Washington. Charlayne?
CHARLAYNE HUNTER-GAULT: Robin, the Reagan campaign produced a laundry list of economic promises. If elected. Governor Reagan promised to: cut taxes, build up the military, preserve essential social programs, and balance the budget. A tall order, at the very least. Impossible, claim the critics. But the Reagan landslide, that also brought GOP control to the Senate, seems to give the president-elect vital tools to help him deliver. For example. Republican control of the Senate will mean new faces at the head of such important committees as finance, budget, banking and labor. Republicans also gain greater influence in the house as powerful Democrats, like House Ways and Means Committee chairman Al Ullman, bit the election dust. But, even with all of that going for the president-elect, the question of delivery in the inflation-plagued real world looms large. Robin?
MacNEIL: One of the most important new faces among committee chairmen in the Senate is Republican Robert Dole of Kansas. He`s the heir-apparent to the powerful Finance Committee, through which all taxes legislation must pass. The Senator has already said he`s in favor of moving ahead with the tax cut when the Congress reconvenes next week. He joins us this evening in Miami. Senator, you`ve indicated that the Senate Finance Committee -- you think it should push ahead immediately with it`s own tax cut -- why do that and not wait for President Reagan`s proposed tax cut?
ROBERT DOLE: Well. I think the economy needs it. We have interest rates rising. We`ve got $86 billion in new taxes slated for fiscal year `81.I think the only reason to wait would be who`s going to get credit for it? I think it`s more important that we can do it in the so-called lame duck session. I find Republicans and Democrats willing to push ahead. Governor Reagan has given a signal to go ahead. I would hope that Congress would stay in session until we act on a tax cut to be effective next year, somewhere in the range of $35-40 billion dollars, tilted somewhat to supply side cuts, rather than consumption cuts.
MacNEIL: `Supply side cuts` meaning -- ?
DOLE: Business cuts, some hope, reduce the corporate rate accelerate depreciation, give business a chance to increase its productivity and capital formation. They really need that and the country needs that. And we need it now. And I would add. that if we wait for a new administration to get under way January, we wait for a new Congress to get under way. it may be July or August next year before we pass a tax cut. and if you want to make that retroactive until January 1, `81. it`s going to be an administrative nightmare. I`ve dis-cussed this with the Chairman Long. He`s in full accord. I believe we can push through a bi-partisan measure. And I would hope that we can do that by mid-December.
MacNEIL: Senator, you`ve also indicated that you thought that Mr. Reagan`s proposed 30 percent cut in tax rates over three years might be inflationary. Why do you see that? Why do you think that?
DOLE: It will be inflationary, unless it`s coupled with a restrain on federal spending. Governor Reagan, president-elect Reagan has always done that in the past in his campaign speeches. It`s difficult to restrain federal spending, and my concern is that we may go ahead with a tax cut on a three year basis -- a so-called Roth-Kemp proposal which to me is a good proposal -- but we also, at the same time, must commit ourselves to restraints in federal spending. We can`t have one without the other, or we`re going to heat up inflation.
MacNEIL: What can a Republican-dominated Senate do about realty cutting federal spending?
DOLE: I think, not only a Republican-dominated Senate, but a conservative Senate is pretty much up and down the line. Those who didn`t get the message clearly last Tuesday, who will be running in `82 are certainly under a lot of pressure to be more conservative in their voting and more conservative in their thinking. There are a number of areas where we can cut federal spending. Governor Reagan has suggested, with some few exceptions, across the board a couple of percentage points. We`re working right now on a budget conference, trying to save $2 billion in spending that comes through the Finance Commit-tee. It can be done. It`s going to be painful. But we can do it.
MacNEIL: In general, does that add up to you thinking that it`s realistic to think that a Reagan administration is going to bring about dramatic changes in the economic picture in this country?
DOLE: Is that question directed to me? MacNEIL: Yes. sir
DOLE: I think we are going to have dramatic changes. Not just the administration, but you`re going to find that Congress -- which is much more conservative, concerned about the private sector, oh. yes. concerned about low income Americans and social programs -- that we understand the need to provide some incentive to business, more incentive to business, reduce the capital gains rate, reduce the corporate rate, provide some incentive for research and development, create jobs in the private sector. And this will be a dramatic shift, and we`re going to have a lot of help from men like Senator Long. Senator Lloyd Benson. Senator David Boren -- Democrats, who are concerned about our productivity and our economy. It`s going to be helped along by president-elect Reagan, but I think you`ll find the Congress being an equal partner.
MacNEIL: Charlayne?
HUNTER-GAULT: Some of the most enthusiastic cheering over Ronald Reagan`s victory comes from the American business community. For some reaction from that sector, we go now to Richard Lesher. President of the U.S . Chamber of Commerce, a post he has held since 1975. Dr. Lesher. why is the business community so enthusiastic over Reagan`s victory?
RICHARD LESHER: Well, we at the team here. Charlayne. have been saying for five years, that we were going to come to the end of a forty-year period of economic liberalism. For the last year we`ve been saying that the new period, the new age of conservatism, would begin in January of 1981. We believe it will be a long-term period -- a whole new era -- and it w ill lake al least ten years to begin to restore the vitality of the private sector. We will do that with some of the things Senator Dole was just talking about: tax cuts and tax limitations, spending cuts, spending limitations. A broad-based attack on over-regula-tion of American business. A reexamination of the trade-offs from clear air and energy independence. All of those things will serve human progress, because human progresses based upon economic progress. And. I think, most Americans gave the message last Tuesday that they`re fed up with big government, they`re fed up with inflation, and they`re fed up with taxes that are going up faster than anything that they buy. So everyone`s very pleased with this new age.
HUNTER-GAULT: You just said a moment ago. the plan that you outlined is going to take ten years to restore the kind of economic vitality to the country. What, in the short term can president-elect Reagan do that President Carter couldn`t do. simply to bring down inflation?
LESHER: Well, first and foremost, he can give confidence that he has a plan, that he`s going to stick with that plan. And that plan is broad-based and it embraces some of the things I talked about -- tax cuts, tax limitations, spending cuts, spending limitations and all the rest of it. What we have seen over the last four years, or even longer, over the last 10, 15, or 20 years, is a lot of rocking around on economic policy and turning toward the public sector for solutions to every problem. Solutions that the public sector has been ill-prepared to produce. So. first and foremost, stability and a level of confidence. Ameri-cans had lost confidence in their government. And. in fact, some leadership around the world had lost confidence in the American ability to lead.
HUNTER-GAULT: In what order, and briefly, would you hope to see Mr. Reagan`s economic priorities set?
LESHER: Well. I think the things I`m talking about are all number one priorities, and that`s not a contradiction because, as you know, they -- when you start in January, you`re going to be working in a lot of different committees at once -- tax cuts, tax limitations, spending cuts, spending limitations, as Senator Dole has already said, and immediately working toward energy independence, reexamining the federal lands question, the Alaska lands question, off-shore drilling for oil and natural gas. reexamination of the Clean Air Act. the whole range of regulatory reform. All of those things can go forward, simultane-ously and on track.
HUNTER-GAULT: Arc you as anxious as Senator Dole about immediate tax cuts?
LESHER: No. I`m not. That`s one place where we might disagree. I think the way that he is pursuing it -- he keeps both options open. I think, if. in the lame duck session, you don`t have the votes to get the right kind of tax cut. then you have the option of postponing it until the next time around when you have a different membership in the choir.
HUNTER-GAULT: All right. We`ll come back. Now. for the views of someone who keeps a respectful non-partisan distance, but is a close observer of the economic scene. He is Hobart Rowan, columnist for the Washington Post. Bart Rowan, now that the campaign rhetoric is behind us. do you agree with Senator Dole, that there are going to be dramatic changes in the economic policy of this nation? What do you think?
HOBART ROWEN: Well. I think certainly, that president-elect Reagan is going to try to make dramatic changes, but I don`t think they`ll be dramatic results. I think the thing we have to remember is that there is. deeply imbedded in the economy, a very serious structural rate -- high inflation, high unemployment -- and. as Robin said, in his introduc-tion, the markets had a sobering up in the last couple of days. And what that fells us is that the financial people aren`t looking for any miracles. They still expect that we`ll have double digit inflation -- 10 percent or so -- for the next couple of years. So. I think, surely that Governor Reagan is going to try . He has a mandate to cut taxes. He has this surprising majority in the Senate. He has a conservative House. And. as Senator Dole indicated, even the Democrats have got something of a message. So. he has -- he ought to be able to put through some of his programs.
HUNTER-GAULT: Well, how soon, and in what order do you think he can deliver on these economic promises?
ROWEN: Well. I think, surely the first thing he`s going to go for. and he said so in his own press conference, is a tax cut. He`s committed to a 10 percent tax cut across the board for 1981. `82. `83 and then he intends to index the tax rates after that. I think he almost has to try. and it`s reasonable to think that he can get a very substantial tax cut package passed, if Senator Dole doesn`t beat him to it in the next session of Congress. I. too, can`t quite understand, and maybe Senator Dole will tell us a little more later, why he has moved at this point to take the play away from Reagan. It would seem to me that they have a much better chance to put through the kind of program they want next year.
HUNTER-GAULT: Are you saying that you think the kind of program would be a tax cut plus restraints in federal spending?
ROWEN: Well, the restrain of federal spending is going to be the big test. It`s going to be the big test for Senator Dole. too. because if he gets his tax cut program through, that`s very substantial. That would be inflationary without a coincident spending program. The big test for Governor Reagan, and I think his principle economic advisors know it. is they must make it credible and believable to the financial community, that there is light at the end of the tunnel on inflation. What everybody believes, at this point, is that inflation is so deeply imbedded in the economy that almost nothing they do will bring it down for the next couple of years. And. I might add. that as the Reagan people pursue (he tax cut option, they`re probably going to run head-on into the Federal Reserve Board, because Paul Volcker has said very clearly, that he thinks that going for a tax cut at this point is premature. He would like to see some spending cuts, or even a budget balance. And. I think it`s very interesting to note that, obviously, the Reagan people concluded that, among their priorities, the tax cut comes first, and the budget balance comes second. Their view is something along the lines of what Mr. Lesher said -- is that you have to give the business community the advantage of building new plants, creating jobs, increasing pro-ductivity, and that`s what they say they`re going for. But. it`s a terribly difficult task. I don`t think the American people are going to wait 10 years. I think Governor Reagan maybe has a couple of years to produce some results.
HUNTER-GAULT: In a word, do you think he has over-promised?
ROWEN: Oh. I`m sure he has.
HUNTER-GAULT: All right. Thank you. Robin?
MacNEIL: Finally, the view from Wall Street. Now that the euphoria there is evaporating slightly. David Jones is Vice President and Chief Economics at Aubrey Lanston. a Wall Street investment firm. He`s a close watcher of the Federal Reserve Board. What do you expect the Federal Reserve Board is going to do?
DAVID JONES: They`ve already been doing it. I would say. in a nutshell, they`ve been out-Reaganing Reagan, the fed has been tightening very aggressively in the last couple of months. And that process has turned the bond market on its ear. so to speak. As a matter of fact. I think the die for 1981. is going to be cast -- not so much by fiscal policy and tax cuts, and the other kinds of things we`ve heard about -- but by federal reserve policy, some of which is already occurred.
MacNEIL: Now. you say they`ve been tightening, and that means in very simplest terms, reducing the money supply which makes it scarcer, which makes interest rates LIO up?
JONES: They`ve been clamping down on funds availability in the market. As a result, interest rates have literally exploded. Late August, short term interest rates -- the shortest term into the money market -- around 9 1/2 percent. The last day or so. interest rates 14 to 15 percent. By any standard, that has resulted in an extreme squeeze on the market -- less funds availability, higher cost of money. The prime up at 151/2, some estimates have it at 16 1/2 within another month.
MacNEIL: Now. do you expect Mr. Volcker in the Fed to go on doing this?
JONES: They have paused, it looks as though, in the last day or so. briefly, but. I think their commitment is there. Inflation is the number one objective. The Fed is going to fight it. That works in nicely with administration policy, but. as Bart Rowan suggests, there may be some head- on conflicts, if. on the fiscal side, the tax cut comes in first, and spending cuts are forgotten.
MacNEIL: You mean, the Fed would think we`re fighting inflation, why aren`t you guys?
JONES: Exactly. And that has been the problem for the Fed. The burden has been extremely great. Fed policy, at times this year, has been erratic, but the point to be made is. that the Fed was operating against a budget deficit of S59 billion, in fiscal 1980. In fiscal 1981. a year in which the president-elect can not do to much about, we estimate the deficit at S60 billion, before tax cuts. So. the problem is a great one. The die is cast already for 1981 and it`s going to be a difficult year here to deal with.
MacNEIL: What can Mr. Reagan do about Mr. Volcker, if he doesn`t like what he`s doing at the Fed?
JONES: The relative independence of the Fed has been with us. Some people argue one. way. Some people argue the other, but in the final analysis --
MacNEIL: But. I mean. Volcker`s there, for a while.
JONES: Chairman Volcker has been quite independent of the Carter administration. I expect him to continue on his own course and I think there could well be a conflict, early in the Reagan administration, unless spending cuts are brought into focus. I might add. that Wall Street also is going to want a quick result. It`s nice to talk about ten year time spans, but. in the final analysis, two things count. It`s the tone set by the administration, and. its actions, not words. The words come first, but the actions have to come within six months to a year -- at least a start for actions on the fiscal side -- or we have difficulty.
MacNEIL: Given the new administration`s -- Mr. Reagan`s promises to put people back to work and bring down inflation -- which, presumably is the considerable part of his appeal to the electorate -- with the most optimistic view of it. in your point of view, how soon could that have any impact?
JONES: The likelihood is we`ll get one of the two things next year. My guess is. somewhat in contrast with perhaps what you might call majority thinking in the bond market right now. we will get some break in inflation, but we have to pay a high cost for it. The economy has been through one period of recession. I`m guessing next year, partially as a result of Fed tightening, such as we`ve just seen, we`ll go into a second dip or a second phase of recession. That means inflation, at least temporarily, could drop below the two digit level, but the cost we pay is perhaps higher unemployment. The difficulty is you can`t phase them both in together. If you try. you`re going to blow the world apart. You have to take one at a time. The first, and most important priority, should be to bring down inflation. Then, comes stimulus, and. Hopefully more jobs.
MacNEIL: So. what Mr. Reagan called the witch doctor, in his debate with Mr Carter, may not be able to produce a miracle cure right away.
JONES: Exactly.
MacNEIL: Thank you. Charlayne.
HUNTER-GAULT: Senator Doyle in Miami, you heard what Hobart Rowan said a few moments ago about, among other things, about Reagan over promising. What`s your view on that?
DOLE: Well. I think there`s a tendency in any campaign to make genera) statements, and now we`re getting down to specifics. And. I think we`ll find out that Governor Reagan, or his advisors -- president-elect Reagan and his advisors will come to the Congress -- - if not. if we don`t do something this year, with their tax cut. their specific so-called Roth-Kemp proposal -- 10 percent a year as Bart Rowan pointed out -- - then index the system, along with a lot of supply-side, accelerate-depreciation. corporate rate-reductions. But I do believe, listening to all the players this evening, it`s a very delicate act we must follow. We`ve just had the largest increase in federal spending in history in this past year -- $79 billion. Someone said we`ve had a deficit of $60 billion increases in taxes in fiscal `8 I of 586 billion. There will be a tax cut. And. it seems to me. that as Mr. Lesher said, we have an option in the Congress. We try it. If we can`t get the right package we fall back and start again next year.
HUNTER-GAULT: But are people going to run out of patience as Bart Rowan suggested, or be very upset when they -- I mean they might not understand all these machinations going on in the Congress. People who voted for Governor Reagan on the assumption that they would get some immediate release. I mean, is the over-promising going to be understood in the context you just explained by the American public?
DOLE: It will, if the Congress cooperates with the administration -- the new administra-tion, in restraining the growth of spending. I`m not talking about killing off programs. I`m talking about restraining the growth of spending- if we will help the FED and the Federal Reserve Board. Mr. Schulz. who was in Florida. Miami Herald, says they agree with Mr. Reagan`s economic policies. They`re what the country needs. And they can work together with the Reagan administration. So there is a different view.
HUNTER-GAULT: Excuse me. Senator. I just want to find out quickly if Mr. Lesher agrees with that assessment.
LESHER: Very much so. but I disagree with something you were implying, that the American public voted for Mr. Reagan and expects to have a complete change within six months. I think most people are realistic enough to know that it`s going to take us twenty years to get energy independence from the Middle East. It`s going to lake us ten years to get inflation under control. And what they really want is a stable, step by step direction towards solution to the problem. Instead of stop and go and stop and go and a lot of false starts. They want confidence in their leadership.
HUNTER-GAULT: Do you agree with that, that the American public is going to be that patient and understanding?
ROWEN: I rather doubt it. I think they`ll want to see at least steady progress in some area, rather quickly. I think it would help the Reagan people if they got the tax cut through very quickly. That would be delivery of one thing. And. surprisingly, people have looked to that ten percent. I`ve had people ask me. `Are we going to get that 10 percent." That promise had an effect just as Reagan`s question. `Have you been better off.` had an effect on people. And if he can begin to suggest that they are better off. even in one dimension. I think he will begin to satisfy people.
HUNTER-GAULT: Dr. Lesher. do you agree with what Bart Rowan and Dave Jones said that it is as important to create the credibility that .here`s light a, the end of the tunnel, as is to delay specific policies?
LESHER: Exactly. I think there`s a whole lot more agreement on that show than we think on the surface. We`re all saying the same thing. ROWEN: Not quite, not quite.
LESHER: Well, almost. You have to show progress early next year. As you said. Ban. you`ve got to get a tax bill through, and you`ve got to show some ability to deal with spending to really begin to curb the rate of growth of spending before you bring it down, before you cut it back.
ROWEN: But quickly. you know, we haven`t talked about what he would cut in spending. And I think that`s a substantive issue - apart from economics - is he going to go in and slash welfare? Is he going to deal with social security or what I don`t know, because all he`s said is two percent a year. And I think it`s important to know what it is he is going to cut as well as what the percentages that he is going to cut.
LESHER" I think he said in the first year or two. he`s going to cut across the board. And. after that, he`s going into specific programs, and I think that`s the only way to go.
HUNTER-GAULT: Robin?
MacNEIL: Finally. could we leave people with some of your predictions on the things that actually affect their lives. Starting with you. David Jones, what are you prognostications about the inflation rate over the next year, what`s going to happen to interest rates, what going to happen to unemployment?
JONES: Largely as a result of the inflation process that has gone before, as a result of tight money which has responded to it. I think we will see. for a least a temporary period. a drop in inflation. I am solid single digit territory on inflation from December 1980 to December 1981. I must say I`m a minority. I`m hoping the new administration won`t reinforce that idea. But it looks as though, at least on that front. we may have some temporary progress
MacNEIL: Let`s just go round on the inflation point? Bart Rowan, do you agree it could no as low as that?
ROWEN: No. I don`t think so. I think one thing we haven`t mentioned a. all is that Governor Reagan probably will be successful in getting some further or quicker deregulation of oil and gas prices, something on the windfall profits tax - of putting that back I think we`re going to have a new burst of inflation or, energy at home. That`s going to contribute to maintaining a very high inflation rate. I wouldn`t. look for the rate to drop below the ten percent level in a year.
MacNEIL: Mr Lesher. your inflation opinion?
LESHER: I find myself shocked to agree with Bart, and I think we`re going to have great progress if we can get the inflation rate under ten percent at all but I doubt, we can get it anywhere close to seven percent in the first year.
MacNEIL: Senator, where are you on that?`
DOLE- I don`t have any predictions. But. I do say that it`s no, going to be just up to the new administration Congress has to be a partner in all this. And if we don , act responsibly 10 restrain the growth of spending. I`m very gloomy about dropping inflation very quickly.
MacNEIL: What do you think, back to you David Jones -- interest rates, which really affect people trying to buy houses and many other things. What are interest rates going to do over the next six months to a year, do you think?
JONES: They`re going to break havoc as the new president comes into office. Rates will be so high that many people can`t even think about buying a house.
MacNEIL: As high as they were last winter, when they were up at 18 percent`.
JONES: We may get the 15 to 16 percent territory on mortgage rates, for example. The cut off point most mortgage lenders say is between 14 and 14 1/2. at the highest for qualified people. So. as a result of the die already being cast, as a result of FED restraint already in place, we`re going to see extremely high rates.
MacNEIL: For how long?
JONES: Early into next year. Some decline after that. I`d say by midyear, perhaps we`ll see some relief. Maybe mortgage rates dropping down to the 12 percent area.
MacNEIL: Comment on than Bart Rowan?
ROWEN: Why. no. I think that`s probably right. But. before we forget it. we haven`t talked much about unemployment rates. We had some very discouraging reports today. There`s nothing in the picture to suggest that we have anything but a sluggish recovery, stagnation. I think the unemployment rate is going to remain uncomfortably high, while inflation remains high next year.
MacNEIL: Mr. Lesher? Interest rates and unemployment rates?
LESHER: I think we all agree on unemployment. It`s going to stay high -- above seven percent through most of next year. Interest rates, extremely high through most of next year and throughout much of the decade.
MacNEIL: Senator, a final word from you? We have about half a minute.
DOLE: Robin. I wouldn`t quarrel with those last two statements. I think the sluggish recovery is another reason we need to move quickly on the tax cut. and I would -- but again I think it gets back to Congress, as one member of Congress, we have a responsibil-ity. And as a Republican in a majority party for once in my lifetime in the Senate, we have a double responsibility to demonstrate to the American people that we mean what we say. Or we`ll be out to pasture for another 26 years.
MacNEIL: Senator, thank you very much for joining us in Miami tonight. In Washington Mr. Lesher and Hobart Rowan. Good night Charlayne.
HUNTER-GAULT: Good night. Robin.
MacNEIL: And David Jones. Thank you. That`s all for tonight. We will be back on Monday night. I`m Robert MacNeil. Good night.
