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Election 2000

Robert Hormats: Economic issues and the 2000 Democratic Convention

August 16, 2000
Posted at: 12:51 p.m. EDT

In-Depth Coverage of the Democratic National Convention
(CNN) Ė Robert Hormats is vice chairman of Goldman Sachs (International), a worldwide investment banking and securities firm. Hormats was assistant secretary of state for economic and business affairs from 1981 to 1982. From 1969 to 1977, Hormats served on the National Security Council and, as Senior Economic Advisor, he counseled Dr. Henry Kissinger, General Brent Scowcroft and Dr. Zbigniew Brzezinski.

Chat Moderator: Welcome to the Allpolitics chat room, Robert Hormats.

Robert Hormats: Very nice to be here. Thank you for inviting me.

Chat Moderator: What type of impact do presidential elections traditionally have on the markets?

Robert Hormats: Traditionally, they have a large impact if there are significant differences between the two candidates or the two parties that signal a major shift in economic policy.

Chat Moderator: Do markets typically react immediately to election results, or is there a honeymoon period as the markets wait to see what policies the new administration espouses?

Robert Hormats: If one of the two candidates advocates a position that is very different from current policy, for instance a major change in tax policy, then markets would probably react very quickly if they believe that that candidate could get his or her policies enacted into law.

But, in most cases, there is a tendency to wait until they see how much of the platform or how much of the candidate's policy is put into the ultimate decision-making process when the candidate ultimately takes office. In many cases, candidates will promise one thing and change course between the day of the election and the day they take office, or at least moderate their position to a considerable degree. So, for the most part, markets tend not to jump to conclusions too quickly.

Question from Zz: Mr. Hormats, do you think Greenspan will shrink the money supply if a Republican gets elected?

Robert Hormats: I think Greenspan will wait until he sees, first of all, what the actual policies of the new administration will be before taking any action. And, even then, he would take into account a variety of considerations because the Fed tends not to react directly to administration policies. It tends to react more to its assessment of current and future economic conditions when it makes its decision.

Question from Vex: Since both parties have few differences, don't you think this election will have little impact?

Robert Hormats: For the most part, both candidates are centrists in the sense that neither advocates a radical shift in economic policy.

But there are differences within the political parties, for instance on trade, and I think that those differences to a degree have been papered over by felicitists in the Democratic platform. Some of those differences will have to be reconciled in the year 2001 if there's going to be a consensus on trade policy.

Question from Zz: Mr. Hormats, it seems financial institutions are building all the big new buildings and controlling more and more of the money, when they actually produce "nothing." Is that what happened in the 1920s?

Robert Hormats: I donít think financial institutions are controlling more and more of the buildings in the sense of ownerships. I do think there are clearly large amounts of money going into insurance companies and many of them do invest in commercial real estate.

But this period is very different from the 1920s in the sense that there is a very vibrant and a very productive American economy. While some stocks may be overvalued, basic features of the economy are very strong: low inflation, low unemployment, high productivity and substantially stronger corporations than we had twenty years ago.

Question from Elie: Mr. Hormats, doesn't Bush's proposal regarding Americans investing their own retirement monies -- in lieu of Social Security -- make fiscal/investment sense OR is it more akin to Gore's ditty: "A risky scheme"?

Robert Hormats: I think there are arguments for investing some portion of Social Security funds into stocks or bonds. But there are also major issues raised by such a policy.

One of them is: How do you finance the transition, because some of the money that will go into these individual funds is money that will not otherwise be going into the Social Security trust fund. So the question becomes: How do you make up the money lost by the Social Security trust fund?

And the second big question is: What happens if, in fact, the money invested in the private markets by individuals is lost because there is a substantial recession? That could mean that individuals get less out of this scheme than they would from traditional Social Security, and those people are highly likely to come to the federal government to get the additional money.

A potential compromise is to allow the federal government to use private sector money managers to invest a portion of Social Security receipts in the markets as opposed to having individuals do it in individual accounts.

Chat Moderator: A small number of CEOs are growing increasingly concerned about the gap between executive salaries and worker pay. Are you hearing any of these concerns from the CEOs and business people you deal with?

Robert Hormats: I haven't heard those concerns expressed recently but I think there is an issue here of perceived equity, particularly when a large portion of the population feels that it is falling behind in the new economy.

And I think that the key point here is education. Essentially, there is a need for a much greater effort and a much greater sense of urgency on the part of the business community to support a greater effort to educate younger people, particularly young minorities who will constitute a growing portion of a shrinking labor market over the next 20 to 30 years.

The single biggest problem for the business community today, in my judgment, is a lack of well-trained people. And the business community has a strong vested interest in supporting improved education.

It used to be we talked -- 30 years ago -- about "demand side" economics. Next it was "supply side" economics. Now it's "knowledge side" economics, which essentially means that we can't have a world class economy unless we have world class education. In many schools, students are simply not getting that. Therefore that is, in my judgment, an urgent economic issue for business and for our society.

Question from Chicago: Mr. Hormats, would a large tax cut and infusion of cash into the markets from a privatized Social Security be inflationary enough to provoke a Fed reaction?

Robert Hormats: Well, they are really two different things. I think that the notion of a tax cut could be inflationary, but it will only come next year and we really won't know until we get there whether it would be. If the economy is growing at, say, four percent and there is a tax cut on top of that, the chances increase that it would push the economy to a growth rate that the Fed might be concerned about.

The other point is that one of the major reasons the American economy has performed so well over the last eight or nine years, but particularly over the last few years, is that Ė whereas, in the 1980s, the federal government "crowded out" private investment because of its deficits -- now the federal government, by generating growing surplus, is in effect enabling more capital to go into private investment. This in turn increases productivity and increases jobs.

Regarding the second part of the question about money going into the equity markets within the Social Security system: That conceivably could and would strengthen the stock market, other things being equal. And that could in turn generate more of what's known as the wealth effect, which could also push up demand to the point that the Fed would be concerned. But, as I mentioned before, the Fed takes into account a lot of factors in determining what itís going to do and that would only be one of them.

Question from Gregg: With a $229 billion annual interest payment, why are we not more focused and stressing the need to pay down the debt of the country?

Robert Hormats: Well, we should be. We should be focused on this, in part, for the reasons that the questioner mentioned. We have a big debt service burden. In addition, the fact that we have a surplus now gives us more ammunition to use if we should ever slip into a recession because, at that time, it would be easier to use fiscal stimulus to get out of the recession.

In addition, a tax cut now, which simply enables us to consume more today, means that there is less money for programs for our children and grandchildren. They will inherit a larger burden to service and have to repay America's debt in the future.

Chat Moderator: Do you have any final thoughts for us?

Robert Hormats: I think that it is important to recognize that the American economy is not running on automatic pilot and has never run on automatic pilot. Government decisions do matter. We should not take our future prosperity for granted, and that means continuing with a very responsible fiscal policy of paying down the federal debt.

It means continuing to pursue policies that expand trade opportunities, because a growing portion of American growth depends on increased exports and because American consumers want the choices afforded them by a wider range of imports. It also means continuing to put a substantial amount of money in basic research and development at the private sector level and at the government level.

And, finally, it means providing businesses with the environment needed to invest in the new technologies, the new pharmaceutical products and the new innovations that are going to be critical to our prosperity in this new century. A strong business environment is vital to creation of jobs and growth. Government policies which create a positive environment for business and for entrepreneurial investment are vital for the future of the American economy.

Chat Moderator: Thank you for joining us, Robert Hormats.

Robert Hormats: Thank you very much for having me.

Robert Hormats joined the Allpolitics Chat from the Democratic National Convention in Los Angeles. provided a typist for him. The above is an edited transcript of the chat, which took place on Wednesday, August 16, 2000.

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