Liz Claman, Mark Zandi on Health of U.S. Economy

The following is a rush transcript of the August 15, 2010, edition of "Fox News Sunday With Chris Wallace." This copy may not be in its final form and may be updated.

BRET BAIER, ANCHOR: With everyone looking for signs about the economic recovery, the news of the week was confusing at best. For instance, retail sales went up in July after two months of declines, but people filing for unemployment benefits went up last week as well to the highest level since February.

For some insights now, we turn to Mark Zandi, chief economist for Moody's Analytics -- he comes to us from San Francisco -- and Liz Claman from the Fox Business Network, who is in New York.

Welcome to you both.



BAIER: Well, we look at the numbers. The Federal Reserve in a statement about the economy this past week said this, quote, "The pace of recovery in output and employment has slowed in recent months." It said while it still expects the economy to grow, the improvement will be, quote, "more modest in the near term than had been anticipated."

Then we had June's trade deficit numbers. They shot up 18.8 percent to $49.9 billion, much higher than expected, the highest since October of 2008. And because of that and other indicators, now we're hearing the Commerce Department could revise its growth projection, the GDP, from 2.4 percent down to somewhere below 2 percent.

With that preamble set up, is this economy positioned potentially to go into a double-dip recession?


ZANDI: It's -- the odds are rising. I'd say they're uncomfortably high. But I don't think we will experience a double dip. If I had to put odds on it at this point, I'd say one in four, perhaps as high as one in three.

But you know, I do think, given how profitable businesses are, given how much cash they have on their balance sheet, given some other things that are going right for the economy, I think we'll make our way through without a double-dip recession.

BAIER: Liz?    CLAMAN: You know what, Bret? I'm glad you brought up a couple of things like the trade deficit, because while that was discouraging, definitely not looking good, you know, we've had, what, 11 recessions since the World War II end and only one double dip. These are very, very rare.

However, there's -- there are all kinds of memos -- and Mark would know about this, too -- that circle among economists because we're all reading each other's work and trying to see what's going on. And it's very, very rare to have this opportunity. But a lot of people say, "How can we have a double-dip recession when we really haven't emerged from the current recession?"

Now, there are all kinds of metrics that say, "We're out of the recession." But you talk to all of the unemployed people out there, and they would say, "I still feel a recession."

That said, Mark mentioned that there are some positive indicators such as, for example, some of the companies looking very healthy. And it's these companies in particular -- UPS, FedEx, a lot of the rails like CSX Rail -- they're actually shipping product. They're shipping things. That gives some people an indication that maybe things aren't as bad as they may feel or look.

BAIER: Mark, you've been quoted by Republicans and Democrats. Should there be more stimulus? You've supported the past effort and the 26 billion that just was approved for the state governments. Should there be more stimulus now?

ZANDI: No. I think we've done what we need to do. I think it was important for Congress to extend emergency unemployment insurance benefits through the end of the year. I think that was the right thing to do.

I think providing more help to state government, which is what Congress has done over the past week -- I think that was appropriate and will be helpful for the economy. But at this point, no, I don't think we should provide more stimulus to the economy.

BAIER: But, Mark, when we look at the first stimulus -- there are folks who look at it and say, "Is this really working?" You know, the administration says it saved 2.5 to 3.6 million jobs -- saved or created.  The Bureau of Labor Statistics say that -- says that 3 million jobs were lost, real jobs, since the stimulus was signed in February. So was it a success?

ZANDI: It was, in my view. I don't think it's any coincidence that the recession ended just about this time last year when the stimulus was providing its maximum economic benefit to the economy.

Now, it's very difficult to prove -- it's impossible to prove because we don't know what the counter factual is. We don't know what the world would have looked like without the stimulus. But in my judgment, based on my work, I do think the estimates that are coming out of the Congressional Budget Office and other sources that we'd have 2.5, 3 million fewer jobs today if we had not had the stimulus is roughly right.

The economy is not good, obviously. We're not creating enough jobs.  Unemployment is still too high and likely to rise further later this year.  But I think it's fair to say that we'd have lost a lot more jobs and unemployment would be measurably higher if we had not gone down the road of stimulus.

BAIER: Liz, the stimulus is a political football 79 days before the midterms.

CLAMAN: Right. Oh, absolutely. And there's so much discussion -- stop spending money. Let the current stimulus -- much of which, by the way, Bret, hasn't actually gone into the system. Let that get into the system. If this is a drip, some type of I.V. drip, let it get in. Let the bag finish up before you start adding more and pumping in more.

Look, you've got a lot of businesses and a lot of states and cities that have money that they, too, are hoarding. They're scared. They don't want to spend that money. Just on Fox and Friends this morning I was watching an interview with the mayor of Fort Lauderdale who said they haven't spent all their money, but what they did with some of it was hire 12 new police officers. So you could look at that as a success. But let the other money go through.

Political football, you bet. And I doubt that the U.S. public has a real appetite anymore for a big chunk of stimulus going in. But there were missed opportunities here, Bret.

You could argue that the prevailing wisdom is what really creates jobs -- what would create jobs? Those are small businesses and brand new businesses that are starting up. But they can't start up if there's a bunch of red tape.

Now, the Obama administration put in some ideas such as tax incentives if you hire unemployed workers. Fine. But what company, what entrepreneur out there, is going to want to actually start a brand new business if its two owners -- for example, the U.S. patent office -- there was an op-ed in the New York Times written by a federal judge and an entrepreneur who said there are 1.2 million patent ideas that are just stuck in this backlog because the process takes five years to get it approved.

If all these ideas were approved, then venture capital -- these are the guys who seed these businesses -- would give money to them, start it up, and they'd start hiring. For every brand new business, you get three to 10 workers hired. Why not? Instant stimulus. It's just a little bit misdirected at this point, I think, much of the public believes.

BAIER: The real political fight here in September will be whether or not to extend the Bush era tax cuts. They expire in January -- whether to extend them all, whether to just extend some of them, and not extend them for the top earners.

Former congressman, now Senate candidate, Pat Toomey weighed in with the Republican's message this weekend. Take a listen.


PAT TOOMEY: We should make the current tax rates permanent instead of raising them at the end of the year. And we should cut capital gains taxes to encourage business investment. Even prominent Democrats have recently said the last thing we should be doing in a recession is to raise taxes.


BAIER: Mark, should all the tax cuts be extended?

ZANDI: Yes. I don't think it would be appropriate at this point to raise taxes on anyone, certainly not in 2011.

Now, I do think when we move into 2012 and '13 when, presumably, the economy is on firmer ground, I would allow the tax rates for upper-income individuals to revert back to where they were before the cuts in the 1990s.  I think at that point it makes perfect sense.

And we're going to need to do that because we do need to address our long-term fiscal problems. Our budget deficit is too high, our debt load too wide. And we're going to have to address that, in part, by higher taxes.

Now, in my view, addressing our long-term fiscal situation would be most appropriate by restraining spending growth. But tax increases are going to be part of that. And tax increases on upper-income individuals has to be part of that.

So when the economy's off and running, yeah, I think we should raise the rates, but not in 2011. I think the recovery at this point is still too fragile.

BAIER: Treasury Secretary Tim Geithner appears to be leaning towards moving faster on that, letting the top earners' tax cuts expire. Here's what he said in a recent interview, quote, "The country can withstand that.  The economy can withstand that. I think it's good policy."

Liz, is it good policy now?

CLAMAN: This is just not a good idea right now. I'm with Mark on this. If you are going to just continue to at least try and stabilize this economy -- and we've taken some hits. You mentioned jobless claims over the past week. They fell to near six-month lows, the U.S. dollar floundering -- 15-year low -- against the Japanese yen.

It's just not a good idea. This could really cause some problems at the moment. But again, I completely agree with Mark that in a year, if both Republicans and Democrats are serious about drawing down that deficit, then you do have to let some of that sunset.

But if you wanted that so-called shock and awe campaign of trying to really stimulate things, make the across-the-board announcement and say, "You know what? We can't do this right now. It's not going to work at the moment."

However, you've got people like Warren Buffett, the wealthy, saying, "Let it sit on our shoulders." Not all wealthy believe this, of course.  They say, "We're the ones who create the jobs and start the businesses so don't hurt us."

But it's not a good idea, and you would really inspire some positive goodwill here if you were to hold off until 2012.

BAIER: Mark, what about...

ZANDI: Bret, can I make...


ZANDI: ... one other point?

BAIER: Yeah, go ahead, Mark.

ZANDI: I was just going to say whether we -- whatever we decide about the tax -- the tax cuts, I think we have to decide that quickly. I mean, I do think it's one of the reasons why businesses, and particularly small businesses that Liz was referring to, aren't hiring -- and we need them to hire to get this job machine going and get unemployment down -- is that they're uncertain.

I mean, we're debating lots of very important policy issues, and I think we need to do it. But while -- and one of those are the tax cuts.  But while you're in the middle of those debates, the uncertainty   that that creates is causing them to freeze.

So I think it's very important for Congress and the administration to nail this down quickly one way or the other, just so that we get some clarity to allow those small businesses to start to hire again.

BAIER: And, Mark, quickly, about what the Federal Reserve is doing.  Is there a risk here of deflation or, worse, stagflation, where you have high unemployment and also high inflation?

ZANDI: No. I don't think we should be worried about that, certainly not in the next year or two. The economy is just too weak. Unemployment is just too high. The deflationary risks are predominant and I think it's very important -- in fact, vital -- for the Federal Reserve to remain very aggressive.

BAIER: Liz, we talked about the deficit and the debt. The president's debt commission doesn't come out until after the election with their recommendations.

But you look at the federal debt held by the public. It shot up in recent years. It's expected to be almost 65 percent of GDP by the end of September, and this does not include all the entitlement debt. Obviously, that would take it up to about 98 percent.   How big of emergency is this, the debt situation?

CLAMAN: It's awfully serious, extraordinarily serious. This is something where if other countries stop buying up our debt -- although we haven't seen an indication of that yet, so don't want to overstate that -- then we would find it awfully difficult for the United States to continue to borrow money.

This is a problem that we need to, of course, address. And how do you address it? Stop the spending, cut the spending and, of course, get more tax revenue. You're not going to get tax revenue until we have a bottoming of an economic sort of dish here.

And when you look at the overall picture, we do have the negative problem with the job situation. We do have the consumer not spending as much.

And then you superimpose that picture, Bret, over a global economy that, minus Germany and China and some of the South American countries, doesn't look very healthy. That's not a portrait that you put up on your wall and say, "That's a lovely picture of a recovering economy." We are not there yet and the deficit does not help.

BAIER: Liz Claman, Mark Zandi, thank you both for your insights today.

CLAMAN: Good morning. Thank you.

ZANDI: Thank you.

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