Senior Finance Committee Democrat Briefs ACCF Supporters

“CONGRESS and the Administration are engaged in battles on two fronts as a result of the September 11 attacks,” Senator John B. Breaux (D-LA), a senior member of the tax-writing Finance Committee and chairman of its Social Security and Family Policy Subcommittee, told participants in a September 27 ACCF Capital Formation Forum.

“First, we are fighting terrorism, and second, we are trying to come to grips with a U.S. economy that is in recession. The good news is that weÕre all singing from the same page. The bad news is we don’t know for sure which page,” the senior senator from Louisiana opined.

Sketching out the dilemma facing policymakers today, Senator Breaux noted that there are three levers that can be used to try to stimulate the economy: tax cuts, lower interest rates, and higher Federal spending. “We’ve pulled each of these levers. We’ve cut taxes, the Federal Reserve has lowered interest rates eight times so far this year, and we’ve just spent an additional $40 billion in Federal monies to try to mitigate the effects of the September 11 terrorist attacks and we’ll do more in the days ahead.”

“I don’t think the fiscal and monetary stimulus we put in place earlier this year has had time to work yet. For example, Federal Reserve Chairman Alan Greenspan has said that only about 18 percent of the 2001 tax rebates for individuals have been spent on consumer goods so far,” Senator Breaux observed.

Reflecting on what the economic stimulus package that was just beginning to be discussed on Capitol Hill and in the Administration should look like, he noted, “We should do something right, not just something quick.” He added that some policymakers are calling for more Federal spending, while others lean toward new tax cuts.

Senator Breaux stressed that a number of industries, including the travel and tourism industry so important to Louisiana, have been hit very hard by the events of September 11 and suffered substantial job loss. “Increasing airline security is tremendously important to getting people traveling again,” said the senator, who favors federalizing airline security. He also underscored that the nation should seize this opportunity to forge a national energy policy. “We must reduce our dependence on foreign energy. We are much more vulnerable today than in the past and we could be brought to our knees if we don’t take appropriate measures. We have a golden opportunity now to move forward on this critical issue.” Assessing the chances of coming up with effective fiscal stimulus and energy security measures, Senator Breaux noted that there is no “silver bullet” to get the country out of the problems it faces. “Whatever we do must be done in a bipartisan fashion. We cannot let the terrorists think they have crippled this country.”

Presidential Economic Adviser Lindsey Speaks at ACCF Association Council Meeting

Dr. Lawrence B. Lindsey, assistant to the President for economic policy and director of the National Economic Council, briefed members of the ACCF Association Council on the U.S. economic outlook at their fall meeting on October 19.

“Reflecting on the economy in 2001, it is clear that we are coming off the excesses of the 1990s,” Dr. Lindsey said. “We are in the midst of a business cycle adjustment with enormous wealth destruction. In the fourth quarter of 1999 economic growth stood at 8 percent, while growth in the second quarter of 2001 was zero. Monetary and fiscal policy responded appropriately to economic circumstances, and third quarter 2001 data suggested that the economy had stabilized. Then came the events of September 11, and the world changed.”

Dr. Lindsey stressed that psychological factors stemming from the deflation of asset values in the late 1990s, combined with the terror attacks, have made people much more risk averse. “People who used to buy stock in companies with no profits and no sales now won’t even board airplanes,” he said.

Restoring consumer and investor confidence is a key challenge for policymakers, Dr. Lindsey asserted, noting that economic growth in the fourth quarter of 2001 is expected to be negative which, combined with zero growth in the third quarter, means that the economy will be officially in recession. He outlined several core problems with the U.S. economic infrastructure that must be addressed, including repairing the damage to the airline network, ensuring that businesses have access to adequate insurance, and providing for defense spending, among others.

“We are facing an extreme case of risk aversion, or lack of confidence. We have called on monetary policy and perhaps pushed it to its limit. Our only other tool is fiscal policy. How do you avoid risk aversion without increasing government spending? You lower the cost of capital and that is what the tax stimulus package proposed by President Bush will do. The principal provisions on the business side of the stimulus package are special accelerated depreciation and AMT repeal. On the personal side, income tax rate cuts are accelerated, which helps both individuals and small businesses. To shape this measure, the Administration conferred with the Congressional leadership and with the chairmen of both tax-writing committees. We believe the final stimulus package that emerges from Congress will look much like that proposed by President Bush,” Dr. Lindsey said. He also noted that he anticipates the Federal Reserve will continue its efforts.

“The alternative to taking strong and effective monetary and fiscal policy action to improve the U.S. economy is unthinkable. We will simply not let Osama bin Laden stop the American economy in its tracks,” Dr. Lindsey concluded.

Association Leaders Outline Goals

Representatives of ACCF Association Council members offered their views on the economic outlook for their industries and reviewed some of the policy goals they hope to achieve in the coming months. Discussion leaders included Marc Lackritz, president of the Securities Industry Association and co-chair of the ACCF Association Council; Paul Huard, executive vice president, finance and management, National Association of Manufacturers; Steve Wechsler, president and chief executive officer, National Association of Real Estate Investment Trusts; Tom Parker, director, energy team, American Chemistry Council; Jim Klein, president, American Benefits Council; and Ron Clements, senior director, governmental affairs, Edison Electric Institute.

Mr. Lackritz of the Securities Industry Association addressed measures that would promote a strong U.S. economy and vibrant financial services sector from the perspective of the securities industry. He noted that the securities industry has focused on problems resulting from the terror attacks and that effort is going well. The Federal Reserve has done an excellent job of providing liquidity for the financial system, he said, but added that economic forecasts now indicate the recession will last until the third quarter of 2002. The current low interest rates are stimulative, but could benefit from additional fiscal stimulus. The industry broadly favors accelerating the effective dates of the tax cuts from last spring, as well as accelerated depreciation. There is some concern that if the fiscal package became too large, long-term interest rates might begin creeping up again. There are mixed views in the securities industry about the efficacy of capital gains tax cuts as a short-term stimulus. In addition, SIA strongly favors permanently extending the provisions of the code that defer taxation of multinational business income in financial services since U.S. multinationals in financial services are disadvantaged relative to their non-financial competitors.

Mr. Huard of the National Association of Manufacturers told ACCF Association Council members that the manufacturing sector had been in recession prior to September 11. He stressed that stimulus is needed on the tax side, noting that accelerated depreciation, speeding up of individual rate cuts, demand-side stimulus for lower-income individuals, and repeal of the corporate alternative minimum tax are all productive approaches to current economic ills. It is essential for a stimulus package to move quickly, Mr. Huard noted, adding that the worst possible result would be for the Congress to adjourn without acting on such a package.

Key issues facing the real estate industry were reviewed by Mr. Wechsler of the National Association of Real Estate Investment Trusts. These include financing, security, and insurance. Mr. Wechsler stressed that it is critical to have terrorism insurance available. Without terrorism insurance, providing real estate financing will be very difficult. The insurance industry has come forward with a proposal to create an insurance pool that would be voluntary and have a life of six years. The reinsurance industry would assume some of the risk, and the Federal government would provide a backstop. The Federal government has developed a quota share approach through which the government would provide specific financial guarantees over three years. Industry has problems with this approach, including its proposed short life, Mr. Wechsler noted.

Mr. Parker of the American Chemistry Council reviewed issues of importance to the chemical industry in the area of regulatory reform. He noted that climate policy is of particular concern to his industry, which has been very successful over the past decade in facilitating energy efficiency and decreasing carbon intensity. He stressed that his industry supports a national energy policy and believes that more research is needed on climate issues. In addition, barriers to new investment in environmentally friendly plant and equipment should be removed.

Mr. Klein of the American Benefits Council discussed current issues facing sponsors of private retirement plans. American Benefits Council members have been involved in the regulatory followup to the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001, which increased contribution limits in IRAs and 401(k)s and improved plan portability. They are also shaping the next generation of proposals for consideration by the Congressional champions of pension reform. Separately, Congress is currently considering legislation to liberalize the rules governing the type of information that investment companies can provide to retirement plan participants about the investment companiesÕ own products. Looking ahead, Mr. Klein predicted that one result of the financial impact of the economic downturn on defined contribution plans will be renewed interest in defined benefit plans.

Mr. Clements of the Edison Electric Institute briefed ACCF Association Council members on the current state of energy security. In the wake of the September 11 terror attacks, the energy industry is concerned with preparing for or preventing future incidents. Increasing security for the nationÕs critical infrastructure will be costly, involving upgrades to facilities, communications, business operations, and personnel, and the private entities who own and operate the vast majority of that infrastructure are unable to bear the costs of upgrades on their own. With that in mind, EEI has formed a coalition of corporate entities that share the concern for funding the new infrastructure requirements and upgrades. The energy industry also supports government intervention to assure that appropriate licensing and siting of new transmission facilities is undertaken in order to help eliminate electricity supply problems.

For further information about the ACCF Association Council, please contact ACCF President Mark Bloomfield at 202-293-5811 or markbloom@aol.com.