(00:00:00) It's a real pleasure to welcome so many of you here today, and I also want to welcome our radio audience throughout the Upper Midwest who thanks to the law firm of Oppenheimer Wolfe and Donnelly is hearing this broadcast on Minnesota public radio's midday program. Minnesota meeting as many of you know is a public affairs Forum which brings National and international speakers to Minnesota members of Minnesota meeting include Community leaders from corporations from government from Academia and the professions this year. We're very happy to be celebrating our tenth anniversary of bringing the marketplace of ideas to you. Our speaker today is dr. Murray Whedon, bomb who served as President Reagan's first chairman of the Council of economic advisers. He helped formulate the economic policy of the Reagan Administration and was a spokesman for the administration on economic and financial issues. And I have four warned him that he may be getting some questions on that. He says he's ready. Dr. Wheaton bomb currently. He was professor of Economics at Washington University in st. Louis and he has written extensively on economic policy issues taxes government spending and regulation his latest book, which I believe was published. Just last month is small Wars big defense paying for the military after the cold we're cold war. Excuse me. It is a certainly a timely commentary on how the American economy can adjust to large defense cutbacks move toward a more civilian. Economy and still maintain the capability to reverse course if necessary in his address today. Dr. Wheaton bomb will discuss a question that's being asked pretty often these days the US economy after the Cold War. Will there be a peace dividend following his presentation? Dr. Wheaton bomb will answer questions from the audience Jayne Murray Asik and Gloria mcclenahan of Minnesota meeting will move among you to manage this part of the program. There are slips of paper at your tables and I think it would be helpful if you jot down any questions that come to mind and now it is my pleasure to present to you. Dr. Murray Whedon bomb. (00:02:39) Thank you, Miss. Josephine. Ladies and gentlemen, I very much appreciate your bringing spring early here in Minnesota for a southerner like me and I do appreciate the opportunity to meet a lot of old as well as new friends as you may have heard. The Cold War is Over. But as a nation, we still have to face the challenges and opportunities that arise from the collapse of the Soviet Union and its military threat. In my view the most reasonable basis on which to plan our own National Security is to expect large continued reductions in military spending over the next five years, if not longer and in my view, the cutbacks will be more than the very modest 50 billion dollar down payment that the Pentagon has announced in terms of budget cuts. I believe we can plan on defense reductions of 5% or more a year saying that I need to note that the general magnitude of those cuts will be less as a share of our economy. Then the cuts at the end of the Korean war or the end of the Vietnam War. We'll still have a large military establishment and I think we need to because we continue to live in a dangerous world. I'd like to draw on my new book small Wars big defense to analyze the five key policy decisions that need to be made very frankly longer. We make long. We wait to make those decisions the tougher the going to be very first decision is to reduce the military force structure the procurement of Weapons Systems to the lower level of funding voted by the Congress. President Bush Secretary Cheney have yet to make those difficult choices? I mean reducing the number of aircraft missiles and ships the defense department buys. Promptly carrying out those budget cuts will have a positive effect in one important way. It will reduce the great uncertainty that currently hangs over the entire defense industry their companies their employees their families. My guess is one out of four people. May find their jobs disappearing in defense production. But four out of four people are worried that the axe will fall on them. When three out of four will continue working for the fence. Some of the cuts that need to be made I think are obvious. The Navy is still planning to build an outfit a series of Home ports for a 600 ship Navy. We don't even have a 500 ship Navy and that number is going down. Where does the pressure come from to continue? What I think is only can be described as a boondoggle the cities with a new ports are being built. They confuse pork with patriotism. In fact, I have an instant formula. Do you want to convert the most dovish member of Congress to becoming a hawk easy? Try canceling a defense contract or close the defense base in his or her District? But some perspective is needed we've had what can only be described as a feast and famine stop-and-go policy toward the fence budgeting ever since the end of World War Two. I think we need to avoid setting in motion another stop and go cycle. I can't think of anything. That's more wasteful. Of the money that is spent on the fence. I think the effectiveness of the defense budget that remains will be enhanced by lowering the Peaks and read raising The Valleys that may not be popular. But I think that's what the National Security with a national interests requires and that means thinking ahead to the next generation of Weapons Systems to replace the ones that become obsolete in this continued dangerous World in which we live in just consider the Middle East if you think that the Millennium has come in terms of a truly peaceful world the second key policy decision that we need to Undertake is to maintain the social safety net for laid off defense workers and their communities. I'm pleased to see that the newest extension of unemployment compensation has become a nonpartisan matter and looks like Congress will speedily vote it and then the president sign it that's that's important, but that's just for starters because the real safety net is a strong growing economy with Rising job opportunities, because in the absence of that there will not be An effective translate transition from defense to the civilian economy and let me clear the air right off the bat the peace dividend in terms of dollars available in the treasury. It's long since been (00:08:33) spent (00:08:35) with a 400 billion dollar budget deficit staring Us in the face. There ain't no peace dividend or if you want view another way. It's been spent to bail out the Savings and Loans. the real peace dividend and substitute economic fashion We'll be finding productive commercial civilian employment for the people for the resources. That will be moving out of Defense. That's the real payoff. Having said that I don't think very frankly that we should Grant special favors to defense companies or special favors to the employees. The former employees of defense companies that social safety net should be a fair (00:09:28) one. It should (00:09:30) treat people the same if they lose their jobs from a cutback in the fence or if they lose their jobs because the tighten monetary policy and that's happening earlier period results in layoffs of construction workers. The third key issue is how to provide adequate support for Science and Technology. This is a sleeper issue. I think it's one of the most important if we can answer it. That's how we'll really get the peace dividend in terms of effective use of Not just the dollar resources, but the people going into fence. Why do I say that? Research and development we know is basic to the productivity to the competitiveness of the United States one of the few plus items in our whole balance of trade our high-tech products year after year, we export more high-tech products than we import. Well, the Department of Defense is the largest single financier supporter of R&D research and development of Science and Technology in the nation a cutback in the fence automatically means a cutback in the support for Science and Technology. That's not a justification for an extra level of spending in the Department of Defense. It is a justification for promoting Science and Technology. I can think of many ways for example the research and development tax credit that Congress grudgingly an axe a year at a time could be made far more effective by having that as a permanent law, but I turned to the pentagon's budget itself. This reduced budget still will procure tens of billions of dollars of equipment and Weapons Systems. We need to break the barriers the bureaucratic barriers that have been erected between the fence R&D and civilian R&D. In fact, some companies have almost what we call a Chinese wall between the military Laboratories and Military Work and the commercial work of the same. I've come across the company that whether the military division needed a component from the civilian division. The civilian division would not sell it to the military division it gave it to them for free because if it's sold it to them they have to abide by all of the bureaucratic rigmarole that goes along with defense Contracting berries to R&D you betcha and this leads me to my fourth point. The fourth challenge is to introduce. Yes a dose of deregulation into the military procurement process. I've described the military procurement process as a place where Franz Kafka meets Alice in Wonderland, you have to see it to believe it. Let me give you a couple of examples When the military 112 by a fruitcake, they issue 17 pages of detailed specifications, including two tables of data that the manufacturer of The Fruitcake has to meet and the requirements and good bureaucratic language require that the aroma be organoleptic Lee detectable, by the way, when I wrote a recent article on the subject some friend wrote in to me you shouldn't tell the Pentagon how to buy fruit cakes more efficiently. We already have enough fruit cakes in the belt word. But you can imagine when the military buys a weapon system on one cargo plane. A total of 240 thousand pages of supporting material was required in the proposals three and a half tons, and I'm be tempted to say that didn't prevent a massive overrun. I don't think it's the accurate way of putting it. I think that helped cause a massive overrun. We need a tremendous dose of deregulation so much those Mickey Mouse rules Come From members of the Congress who view the military budget as the biggest pork barrel and attach all sorts of things that have nothing to do with the efficiency of military procurement, but are a sneaky way of awarding some pressure group some interest group a benefit without having to go through the appropriation process. I don't think we can afford that luxury anymore and the something more fundamental (00:14:21) about it. How (00:14:23) can we expect the people whether they're in the armed services or in the defense companies to follow the highest ethical? Constable's when the Congress that sets the tone views the military budget is the nation's biggest pork barrel Integrity has to come from the top. Let me give you the fifth and final point and one that very frankly is not terribly popular because here I conform to your traditional view of an economist as the wet blanket and I am going to bring the wet blanket to this party. So to speak the fence companies need to continue the substantial and painful downsizing that is now underway. They must maintain the financial strength to operate in this difficult Market environment by slimming down right-sizing streamlining to use all euphemisms that commercial companies are doing and if they don't they will go under That is your candid and I've read in the recent months a great many proposals to convert the fence companies to commercial work. Let me say sadly. Those are uniformly characterized by naivete and Wishful Thinking at best. They are a diversion of company attention at worst. They will dissipate the remaining assets of Defense contractors here. We need to learn from history. There's no shortage over the years of attempts by defense contractors to use their factories to use their people to penetrate civilian non Aerospace non-defense markets. (00:16:14) The lessons are (00:16:15) clear. They fall on their faces again and again. These these efforts are abandoned sold at a loss or operate at the most marginal levels. They do dissipate the assets study after study has tried unsuccessfully to come up with a single good example of the conversion approach working. In fact, I can give you the reverse my major. Example here is Curtis, right? (00:16:50) You (00:16:50) may recall those of you my generation curtiss-wright produced more airplanes than any other company in the United States during World War Two, but they got the conversion bug at the end of the war. So they pretty much abandoned the military market and so I producing Industrial Equipment. What was the largest aircraft producer in World War Two now operates at about two hundred million dollars a year while its counterparts report annual sales in the billions. Let me put this way in its worst year a well-managed company like Procter & Gamble doesn't try to make missiles or space Vehicles. Why should we expect General Dynamics or Lockheed to be able to make soap or potato chips? They are different kinds of companies. I'm not saying this to poor mouth the fence companies because the commercial companies can't handle the high-tech systems work that those fellows do but conversely If you have the ability to meet the government contract requirements, the high-tech the low production runs the high unit cost. You come a very different (00:18:14) company (00:18:16) than typical commercial organization and I think forcing defense contractors to try to penetrate markets that are alien to them only does a disservice and I give you two examples the hard-nosed company and the company that tried to convert into civilian work Martin Boeing and Grumman are the two examples in the 70s Boeing lost a major share of its defense contracts it cut more than half of its Workforce. You remember those signs were the last person to leave Seattle. Shut the lights. (00:18:57) That was tough. (00:18:59) No doubt about it. Remember I used to work with Boeing a lot of my old friends would call 20-year people to company who are out of work, but the resultant lean efficient Boeing then rode the upturn in commercial Aviation and became the world class company with the highest employment in the industry with a hundred billion dollar backlog Grumman and contrast has one of the shakiest financial positions in the entire defense company why it has spent so much of its money trying to make canoes and all sorts of Civilian work that aerospace companies aren't just aren't geared for let me sum up this point recently. The chairman of Martin Marietta major defense company was asked by the Russians how to convert a tank plant into her ear. Frigerator Factory and here's what Norm Augustine said tear down the tank plant and build a new refrigerator Factory. Let me conclude the American economy can adjust successfully to the defense cutbacks of the 1990s. That is so because the fence after all is a minor player in the overall American economy. It accounts for 115th of the gross national product and even smaller portion of the workforce economic activity in the United States marches to the beat of Civilian drummers the best National Economic Policy to accompany future reductions in defense spending is for the federal government to focus on its own uniquely important responsibilities. What are they developing sensible monetary and fiscal policy? And reducing tax and Regulatory obstacles to business expansion. That's a tall order the real peace dividend. I must stress will occur when defense workers and productive resources move to the civilian economy. The basic lesson that we learned after World War II after Korea and after Vietnam is still pertinent. Once the federal government directs an adequate framework for a growing economy. It should get out of the way. Let me wind up with a look at the prospects for that growing economy focus on for a few minutes on 1992. This is not a year that will go down in the Guinness Book of World Records. But I do think all the Doom and Gloom talk is over done. We are coming out of this recession. Yes at a very slow rate some of the problems that face us before the recession started such as the disaster area in real estate will still be troubling us after the economy turns up nevertheless. The United States is adjusting to a great variety of challenges simultaneously. They are the end of the Cold War the excessive leverage of the 1980s and another wave of costly and burdensome government regulation of the private sector. The Wonder is not that the economy is staggering under that load, but that we are doing as well as we are. My expectation the fact expectation of most economists for this year is a two percent growth rate and the 3% inflation rate. That's not bad considering those circumstances if Congress and the White House don't enter into a bidding war for middle-class votes this year will end more upbeat than it started. Unlike March in the old adage. I think that 1992 came in like a lamb and if not like a lion it will end with a burst of strong Animal Spirits if we let it. Thank you and good luck. Now I have a long well-earned reputation for entertaining questions rather than answering them. But I think I will be put to the (00:23:33) test. We will try and ask some entertaining questions. Dr. Wheaton bomb George Maury has the first question. (00:23:40) Yes. Dr. Wheaton bomb. I'd like to change the gist of where we're going for a second. Maybe give you a chance to entertain us talking about the defense industry and the obvious cuts that will be looking at I wonder if you could give us share your opinions if you would on the implications of this internationally particularly, when we look at the increasing dependence that the defense business has on International customers and also issues of National (00:24:10) Security. (00:24:16) Quite clearly the international market for weapons and military equipment. It has always been an alternate alternate market for American defense contractors and typically our federal government for good reason has called Le shots in terms of which kinds of equipment can be sold to which nations and I think that's a very fundamental division of labor. I don't expect defense companies to set American. I don't suspect any private interest group to set American foreign policy. That's why we elect our government for and defense contractors have to carry that out. So the determine clearly defense contractors do and have to and should abide by the determination. That some countries will be off limits will let inhibit the defense firms. Yes, but we didn't sell High cbms to the Soviets during the Cold War and its extension of that (00:25:29) principle. We have a question now from Merritt markwardt. Dr. Wheaton bomb is the decision of Los Angeles County to go by America on the manufacture of its subway cars and to cancel the contract with the Japanese manufacturer step on the road to Folly for both the buyer and the the proposed Aerospace firm (00:25:56) seller. I think it was one of those knee-jerk reactions that they're going to regret because part of the package is for as I understand it the Los Angeles area to buy and if not operate at least own a production facility. There's anything that local government can handle it's just that that's that's the role of risk taking private business at a time. When we're trying to convince the Japanese and Europeans and others around the world to reduce their barriers to our company's it certainly setting the wrong tone for us to erect barriers to foreign companies. We live increasingly in a global economy the share of our exports in recent years as terms of our total. Kaname has doubled sure our Imports have risen also, but we're still a lot the world's largest exporter of the world's largest importer. We have so much to lose by playing the protectionist game, especially in the area like Los Angeles, which is a major exporter. Including an especially an exporter of equipment to Japan. I think that is one of the dumbest actions that could have been taken a strong letter follows as they say. (00:27:36) Thank you. We have a next question here from Susan Flagger. We've heard in the past certainly about the problems with the defense industry and overspending and $200 Hammers and all those things. So where is the leadership if there is any for change I guess I'm speaking from a sort of cynical public perspective on this. It seems to have been going on for a long time. And here we have an opportunity to make some substantial changes with the changes that are happening in the world and a move towards peace. Where will we see the leadership if there is any in a helping us achieve this up? (00:28:20) What I find so fascinating and this that appeals to my sense of cynicism is so many of the same people who have been criticizing often for reason defense companies for being economic dinosaurs living in the Cost Plus mentality. These are the same folks that are pushing hard for legislation requiring the conversion of the fence company so they can maintain their current size. See I think this is a great opportunity to slim down the defenses what my students call the military-industrial complex and have been much smaller part of the economy. I think that is basic now in terms of protecting the public interest on dumb military expenditures the $200 hammer. Which when you look into it artifact of cost accounting, I'm sorry. You didn't talk about the $600 toilet seat because it turns out when you look at those things. The Scandal evaporates, for example, you're not talking about toilet seats, you're talking about the whole part. If you have a gun into a jet airliner that whole Arrangement that part of the job of the John and it turns out that commercial airlines pay. This is just about the same amount for the same item as as the military and in terms of hammers. It turns out if you look at the total cost of the package being bought it's a question of do you set up a detailed cost accounting system that checks off and makes a separate journal entry every time anyone uses a nut or bolt or a hammer or do you have some standardized costs? It doesn't affect the total government spending. It's an artifact of accounting now. You can play a different game if you know which are which is the opposite of what I'm suggesting set up and really detailed cost accounting system. So you will get an accurate accounting of every nail of every Hammer of of every bolt that is used by the defense by ever in any defense plant. But the total cost of production is going to go up now members of Congress know better than that, but they have a lot of fun playing that game. What I'm seriously concerned about is the twenty to thirty percent of the procurement money. That's that goes and that's not just my number. It's number of several different independent studies the 20 to 30 cents of every procurement dollar that goes to meet the paperwork the regulatory requirements hear you talking about billions of dollars. That's where we need to (00:31:28) save. Thank you. Dr. Whitten bomb. We have a question over here now from Jim Campbell. You gave us some proportions. Dr. Wheaton bomb but do you have some actual numbers on the number of workers both military and civilian that you think need to be transferred out of Defense into the civilian and the number of years you would have in mind for that transition. (00:31:50) I don't be mean to be crass Lee commercial. But of course I have the numbers in detail in small Wars big defense and their two specific chapters that deal with that topic, but let me focus on a few things. We are talking about 20 the military reducing 25% and it's got approximately approximately two million people in the armed services and we're talking about 25% reduction in the military and we have several million depending on how Far down you count subcontractors and third-tier subcontractors Etc. We have a larger sum in defense companies and I'm talking about at least a by the 25% reduction they are so we're talking about absolutely large numbers, but in terms of the shifts within the the American economy in any Year, we're talking about a small fraction of the ongoing movements from Company the company industry to Industry region to region that (00:33:08) occur. (00:33:11) I won't say automatically did occur spontaneously in our economy without any special government assistance or the other side of the same coin interference. That's what a private enterprise system is all about. Now, some people tend to forget the rudiments of a private enterprise system. It relies not on government. To find jobs for people depends on people in their own self-interest looking for jobs, but I emphasize there is an important role for government. It's at the macroeconomic. It's at the overall level to create the conditions for a growing economy because during a period of recession, let's face it. This is a hottest time for people who are leaving the military and Industrial Area whether the civilians or military people. This is the hottest time for them to find new jobs a growing economy will expedite that movement, but I give you a bit of advice based on my own personal experience. I lost my first full-time job during a recession. Delmon old-time was 1949 and I found a job during the recession with an organization that was laying people off but it turns out even though they were laying people off they were hiring a couple and I was only looking for one job. (00:34:52) Thank you. You're listening to dr. Murray Whedon, bomb former chairman of the Council of economic advisers under President Reagan speaking to the Minnesota meeting on the station's of Minnesota Public Radio have a next question from commissioner Bill. We're from the Hennepin County Park system. Dr. Whitten Bond my question relates to environmental stewardship as well as the stewardship of our tremendous assets here in the United States of America. I see that we are exporting a great many of our energy dollars in order to buy energy from outside the United States, even though we have tremendous resources here particularly in the form of wind power and we now have the wind turbines capable of harvesting that wind for creating massive amounts of electric power that could be powering our Motor Vehicles as well. Would you comment on the importance of (00:35:44) this? Yes, I've made a specific study of how over the years the States has harnessed new sources of energy. I studied the 19th century where it looked like whale oil was because going to become well whales would become extinct they never did become extinct because the price of whale oil went up. So kerosene became used as the main source of Illumination as a price of kerosene start going up petroleum came into use and there wasn't a shortage of kerosene people just switch to petroleum natural gas the one common denominator in all that is we let the market work. People ask me are you for again sun power wind power. Well, I will make comments about politicians and wind power. But seriously just as soon as that becomes economically sensible. I'm all for it and other parts of the Southwest where SunPower is you is harnessed effectively. Yes, the one thing I as an economist I'm adamantly opposed to and that's spending $2 to get $1 of something and if that's something is energy that doesn't make any sense, whether even though we're trying to develop alternative energy sources. I think it's a question of competition and as soon as alternative energy sources become Actually feasible, you don't have to subsidize people. You won't have to harangue them. They'll know a bargain when they see it. (00:37:47) Dr. Whitten bomb. Thank you. We now have a question from John Herman. I have two questions for you. First you talked about the real estate industry wouldn't the elimination or cut in the capital gains tax? get the real estate industry back on its feet and also get the economy going secondly don't we really have to downsize government itself and eliminate a lot of the regulations and that probably the Congressional staffs who try to micromanage the government from Congress would probably a good place to start (00:38:20) all you've given me a lot of meat that to chew on I think that it's going to take years before many areas work off their Surplus real estate as I've spent less than 24 hours and Minnesota on this trip. So I really can't talk about your local situation, but most of the places I spend time and I'll put this way they don't need a commercial building in Downtown anywhere and no amount of government help is going to change that because when you have vacancy rates like 25% or more Note that it's hard to think of any sensible incentive that will get more construction going now. Do I think reducing the capital gains tax is a step forward. Is it useful? Yes, but very frankly. I put ahead of that restoration of the investment tax credit because I think that in the international competition in which the United States is engaged in its our industry that competes with the industry of other nations, and that's where the shortage of saving investment really hurts us. So and I so testify before the Ways and Means Committee your last month that I'm not poor mouthing the capital gains taxed. I pranked I'd rather see it indexed than the rate reduced but I see investment and direct investment incentives as far more urgent. Now in terms of slimming down the federal government. Well, let me I spoke too hastily in terms of slimming down government. And let me make a point here. Yes. I was involved in the Reagan administration's efforts to reduce government spending including grants and Aid to States and localities in many cases. What I'll tell you what motivated me not a chance the attitude that the state's oddest pick up or locals or to pick up more of the tab, but these aren't activities worth doing in the first (00:40:43) place (00:40:46) and I think that's something that the states and localities ought to consider in a period of budget tightness. Yes, private companies have been right in the 1980s and they still are in downsizing. And belt-tightening. It's high time. The private sector do that. Unfortunately, it's harder to divorce political pressures by definition in public sector decision making oh Congressional staffs have bloated they need to be cut back but the big money spent by the executive branch and here I ate Harry Truman who was on the Senate Appropriations Committee for years who said he never saw a budget that couldn't be cut and I've had several opportunities to sit down and go through as part of my official duties every item in the federal budget and I'm convinced to this day Harry Truman is right every one of those agencies and departments. I feel very strongly on that because back in 1982 President Reagan asked the head of each government agency except for defense to cut the budget. Percent and when I was all over there was only one agency that open carried out the president's order I did and you know not only did the Council of economic advisers survive the ten percent budget cut but more important the Republic (00:42:16) survived (00:42:19) but it took some tough decision making and in terms of government regulation. You're absolutely right public may not appreciate it. But we're in the midst of the most rapid expansion of government regulation in many many years and isn't just a question of expansion. It's a question of often thoughtless expansion. And I hear I speak from lots of experience. Just try criticizing a an environmental proposal and offering an alternative. So here's a better way of doing it. Here's more cost-effective way of achieving our clean air clean water and you are dumped on for being a green eyeshade type who doesn't care about the environment and my only answer is to let them in on the secret economists breathe the same air and drink the same water as real people. (00:43:22) Thank you. Dr. Greenbaum a question here from Eugene sit. Murray the question relates to defense R&D I think we can identify all the economic growth that we have benefited from the defense R&D dollars and with that cut back down the row here. I guess the next concern will be our technology Gap and then economic Gap because of lower R&D dollars spending making permanent. The R&D credit would be helpful in a step in the right direction, but the dollar amounts that necessary particularly as we move into this Global competitive age is greater than ever before as your Institute Centre than study in terms of what we need and how will we get that R&D money to ensure our economic viability? (00:44:17) First of all, I'm convincing the basis of all the research not just done at my center, but done elsewhere that the only sound commercial R&D program. Is that undertaken by the company? Who Bears the risk and who will get the rewards if it's successful now can government help in some ways. Yes, but we're mistaken if we go the route of government taking the risks which also means government deciding which science projects which technology projects to advance because the political process in the United States. Has no ability to do that. The sick Industries have more political power than the growth industries and you want any evidence to back up that assertion the industry that has the most different way types of federal support is the shipbuilding industry expenditures subsidies credit subsidies tax subsidies subsidies subsidies. Sometimes it seems and it's the most non competitive industry in the country. No one buys a ship build an American ship yard unless they're really required to under a government contract. So we're back to how do you encourage companies to do more R&D? First of all you go and this gets back to my answer to the previous question. You go carefully on regulating those high-tech companies. For example, we have a world-class pharmaceutical industry with a very positive balance of trade what's congress's current reaction. They're investigating the devil out of it that considering punitive legislation to give the Food and Drug Administration Untold unparalleled police Powers over the pharmaceutical companies will let's slow down if if the law passes will let's slow down Science and Technology applied to the u.s. Pharmaceutical firms. Sure. Will it will it do a favor to the competitors overseas? You betcha take a look at biotechnology another key area in which United States has the lead I'm giving example here in an agricultural State. The chemical companies have come up with the VST, which is a growth hormone that helps cows produce more milk. Sounds great for the consumer, but producers don't like (00:47:21) competition. (00:47:23) And farmers are no different from Urban businessmen. You know, I tease my my business friends you guys really love competition among your suppliers and there's been there's been an Unholy alliance between farmers and for some reason consumer the self-appointed consumer groups. They don't represent this consumer who gotten lots of state legislators who really are Locus has of scientific power and understanding to declare a moratorium on the use of this simple application of biotechnology is great danger that we're going to regulate biotechnology such an awesome degree again, we're going to see the biggest applications overseas. So when I see the role of government in connection with science and technology, Technology, it's a my reaction is a variation of the advice. I gave a congressional committee a few years ago. Don't just stand there. Undo something. (00:48:36) Thank you. Dr. Wheaton bomb. We have a question now from Matthew Peterson. Dr. Wheaton bomb over here Yes, sir. (00:48:46) If you are elected president in (00:48:48) November, (00:48:52) how would you restore consumer confidence? I think that would be the great book that would be the single greatest blow to consumer confidence that I could imagine this being a nonpartisan meeting. I will not take the opportunity to explain what I think is a much more promising alternative. But I think that you could infer from my background what that alternative would be how but consistent with the substance of your question. I think the reason to the erosion of consumer confidence is clear people are worried that they're going to lose their jobs. The reason I say that isn't just conjecture if you look at consumer income it hasn't come build the way consumer confidence has on the other hand. If you look at the rise in unemployment compensation claims. Then you begin to understand the phenomenon when the claims for unemployment compensation shoot up consumer cut over the years consumer confidence tumbles when claims for unemployment compensation go down consumer confidence goes up and I think that makes sense. So the real answer is a growth strategy which is particular as particularly why when I testify before congressional committees, I tell them get away from the debate about the income distribution effect of tax policy put aside the Bates. Do you socket to the rich the Asaka to the middle class focus on how do you provide more incentives through the tax system for the creation of jobs and let's face it jobs are created overwhelmingly in the (00:50:57) Business system of America. (00:51:01) So the tax incentives like an investment tax credit like a capital gains tax change fundamentally benefit the people who get the jobs that are created by the resulting economic growth. It's the oldest in question in political economy. Do you try to divide up the income pie more evenly or do you try to increase the pie? Well increasing the pie is the only way of creating jobs. (00:51:41) Thank you. We have time for two more questions. Next question here from Terrence, Troy. Doctor you mentioned earlier that President and Congress are kind of running for election Now by trying to offer things that appeal to the voters give them something that they can pay for it with more deficits one that I'm particularly concerned about. Wondered. If you could give me some arguments to Lobby against and maybe a better Target since they seem determined to spend money on something that will help us. Maybe direct them somewhere else is the $5,000 tax credit the particular concern I have about that. Is that seems like as you mentioned there's plenty of real estate everywhere so somehow inducing us to build more even housing market rate housing, which is what this would be. We've got plenty of it the interest rates. One of the argument seems to be that the interest rate drop is done more for the Housing Industry that anything you can imagine. So they've already solved the problem and then some every realtor I talked to has never had a better month. So it seems like it's solved and my problem is that these first-time homebuyers are called renters and Right now the industry that's in trouble is the real estate industry. It seems like $5,000 that is the down payment right now because you can get government mortgages. And so that'll buy you a house and who's going to pay the price of this or going to be the bank's the SNL's and the insurance companies who now foreclose on the mortgage has so it's seems like they've solved the problem with dropping interest rates and now they're going to hurt another industry and bail it out. But when I try to talk to people about it, they just it's too politically popular. Who could we could we aim at where can we aim (00:53:17) them? One of the joys of being a professor is you can profess I profess my opposition to the $5,000 tax credit for very basic reason. We forget why Congress phased out all the real estate incentives back in 1986. Now the way they face them out leaving you to lot to be desired instead of they didn't faze him out of that. It was a sudden death change which may have been too abrupt. But as a country we over invest in real estate in (00:53:55) under-invest in (00:53:59) plant and equipment in the industrial sector and good reason for that is the tax code you was riddled with special Provisions encouraging people to invest in real estate. It's been a painful adjustment away, but that's right. I see no shortage of construction buildings, whether the housing or other in this country lower interest rates are helping people buy homes, but again being scared that you lose your job as an awesome deterrent. Here's what the Congress and the president really need to do forget about quick fixes, which will take effect after the economy turns up. By the way. It's my cynical leading indicator. What they really need to do is to develop the long-term growth plan and and there's a there's a quickie in that and look for the elements of the long-term growth plan that could take effect right now and help yes jumpstart the economy and that's why earlier. I gave a plug to restoring the investment tax credit was that's part of a sound long-term strategy and it could take effect (00:55:23) quickly. Thank you, Doctor. We have one more question now our last question. I'm Korean pareil. She wouldn't dare to pronounce my name. (00:55:36) Yes. I have a two-part (00:55:37) question one is you know being a part of the Reagan government. You must have been a supply-side economics Economist and looking at Bush's State of the State address. Would you say that which side of the economic see come down whether it is a supply-side or otherwise, that's the first question. The second one is I see that both the monetary policies as well as the fiscal policies being used to stimulate the economy wounded in the long run bring back hyperinflation. And if so, that would bring about a break instead of a jumpstart in the middle of its growth. (00:56:19) First of all in terms of being supply-side Economist as opposed to a demand-side economist when I was in the white house, I would testify before Congress and quote the Great British Economist Alfred Marshall who said they were two blades to the economic scissors Supply and the man and I thought that was the essence of wisdom and we can't afford to ignore either one and I think the president's program has a combination of supply side and the demand side incentives and yes, I'm more enamored of the supply side incentives in terms of the investment incentives in terms of hyperinflation. Of course, we need to be concerned about inflation. It's it's a problem that you never solve for All Seasons you don't lick inflation you sir? Do it and with a 400 billion dollar budget deficit The Rebirth of inflation is a reality that we have to deal with. I think so far the Federal Reserve and that's one of the reasons until that one percent interest rate drop in late December. The FED has been so cautious in stimulating the economy. They don't want to bring back the escalating double-digit inflation or worse that we suffered in the late 70s and beginning of 1919 80s. I think so far so good. I see as I said my prepared remarks 3% inflation may be lower this year and given the slow recovery that I anticipate in the next couple of years. I see inflation under check but inflation is a treacherous matter if you ignore it. Assuming that it's not a problem. It will become a problem and if you deal with it because you think it may be a problem. It won't be a problem. It's like fighting inflation is like an insurance policy and I think the insurance here really pays off. Thank you. (00:58:52) Thank you very much. Dr. Wheaton bomb you mentioned rather early in your remarks at a lot of people tend to think of economists as wet blankets. We do not think of you as a wet blanket at all. As a matter of fact, I think you were running.