The crystal ball, please

Reporter-turned-investment banker  and possible Clinton appointee  Steven Rattner discusses the economic prospects for the next four years, and whether the stock market will stay at its giddy height.


Lori Leibovich
November 12, 1996 5:06PM (UTC)

At the top of President Clinton's agenda for his meeting with GOP congressional leaders today was
balancing the federal budget. But Clinton and congressional leaders will have to figure out how to do that while paying for various initiatives, like expanded educational opportunities, in Clinton's second term. And before the President can seriously turn his attention to such issues, he must restaff his economic team in the wake of the departure of Labor Secretary Robert Reich and Council of Economic Advisers chief Laura D'Andrea Tyson, among others.

Popping up on many short lists for an
economic post is Steven Rattner, 44, a former New York Times reporter who became an investment banker and is now Managing Director of Lazard Freres & Co. in New York.
As founder of the firm's communications group, Rattner has been involved
with such high-profile deals as the sale of Paramount Communications to
Viacom and the acquisition of McCaw Cellular Communications by AT&T. We spoke with
Mr. Rattner about America's economic prospects and problems in the next four years.

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You're on many media short lists for an economic post in the new administration —

I'm not in charge of compiling any lists, so you're asking the
wrong guy. You started with a question I least want to talk about. I'm
happy doing what I'm doing and I don't intend to change it. We'll just take
life one day at a time.

But if you were to join the administration, what economic
course would you advise?

Most of what has happened in the last four years has been
very positive. Our move toward a lower deficit and
ultimately a balanced budget is one of the most significant economic
initiatives to occur in years. In addition, the Federal Reserve has
been extremely supportive both of the need for growth and of the need to
continue the fight against inflation. So in the broadest terms, my
desire would be for more of the same. Having said that, there are
several areas that could benefit from further attention.

Such as?

We haven't reached a complete consensus on how to balance the
budget. As part of that, we are going to have to take a look at
entitlements. That doesn't mean we are going to necessarily cut them or
change them, but they have to be part of the discussion. Secondly, if we are to equip people to take advantage of the many good jobs out there — and that we are having trouble filling — we need to equip the workforce with the tools they need to fill those jobs. Administration proposals for tax credits for certain kinds of educational expenses are a good start.

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Is that enough? Educating, training and retraining workers is expensive. Where will the money come from?

Some of the money and incentive will come from the people themselves. When people perceive that there is a good return on investment in education and training, they go and get it. But, yes, education and training is expensive, and will need some government assistance. The Clinton administration proposed consolidating a bunch of training programs that were somewhat inefficient, and certainly expensive, into a
more market-oriented program where people got certain tax credits under
certain circumstances for getting training and education. That puts the
opportunity and responsibility in the hands of the individual,
rather than in the hands of some bureaucracy.

How will the administration find the money to fund its other various
initiatives, given the spending constraints and the pressure to balance
the budget by the year 2002?

The budget deficit has been coming down faster than was
projected — we're on the down slope of the budget deficit problem — and
that may give us a little bit of breathing room. But it is going to
involve some significant sacrifices in other parts of the budget,
no question.

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The Republicans say they will reintroduce a balanced budget amendment,
and they have larger and more conservative majority in the Senate to get it through. Do you support such an amendment, and if it passes, what
effect do you think it will have?

I hope it doesn't pass. I think most people still recognize that it's a bad idea. If you want to balance the budget you should go ahead and balance the budget. But to put yourself in an artificial straitjacket where you have no flexibility to make
policy appropriate to the circumstances is really not a good idea.

If it does pass, the effects will depend on what form it
takes. As long as the deficit is coming down and we're on track to achieve a
balanced budget, it probably won't have a lot of effect. Where it will
have an effect is when you need to change your budget policy and you
don't have the ability to do it because you've got this artificial
limit.

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For example, if there is a recession, which some economists say may be coming.

I have no doubt that there will be another recession someday. But it is
also true that this economy is better positioned for sustained growth
than it has been for many decades. If you look at a consensus of economists and what
they are forecasting, the majority of them do not expect another
recession in the next five years. I don't think they are necessarily
right — I think there could be one — but the point that they're making, and
I'm making, is there is a limit to how far out one's crystal ball works.

I think it's a terrible mistake for people to get too focused on a month-to-month or day-to-day set of statistics. We've had the longest
recovery without a single quarter of negative growth in the history of
the U.S. The fact that growth in one quarter is only two percent and
in another it's 4.8 percent is entirely normal. If we panic or allow
ourselves to be distracted by these very short-term statistics we're
doing ourselves a great disservice.

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Last month you wrote an op-ed piece in the New York Times about the "hysteria"
over corporate downsizing. What caused the hysteria?

To some extent downsizing has been worse than before. It
also affected a different group of people this time — it was the
white-collar, not blue-collar workers who were affected. And I think the
screams of white-collar workers are heard somewhat more loudly.
The media also contributed to the excitement. There is a tendency
in this country to panic at the sight of anything that looks
untoward in the economy. I don't know if that's born of the poor
economic performance that we've had in the past or what. But it's a
dangerous practice.

They may not be panicking, but some analysts are warning that the stock market is too high, and that too many people are investing too much of their savings in it. As an investment banker, where do you think the market is going?
I have no idea. It has reached its current lofty heights in part because the economy is strong, in part because corporate profits are strong and in part because
interest rates are low and people don't have other places to put their
money. In recent years, in particular, the market has been driven by interest rates.
The biggest danger to the stock market is a resurgence of inflation, forcing
the Fed to raise interest rates.

Are small investors relying too much on stock-market based mutual funds,
or should they be diversifying their savings and retirement accounts
more?

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I'm not in the personal investment business, but I think over long
periods of time stocks are generally the best category of assets in
which to have your money. Everyone should have their funds — whether for retirement or otherwise — in a diversified group of assets. If you can afford to take a long view then you should diversify; if you have to take a short view then the
stock market can be a dangerous place.



Quote of the day

Byte this

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"In the computer world, as in horseshoes, close is good enough. In the computer world,
products are considered perfectly acceptable when they almost work the way they are supposed to ...
Practices, policies and standards that would be unacceptable in any other arena have become the norm... [I]magine the outcry if an auto maker knowingly sold vehicles with defective door locks and offered new ones only if you demanded and installed them yourself. The public's tolerance for comparable policies in the computer world is one reason Microsoft is sitting on more than $7 billion in cash."

— Stephen Manes, "Computers: Those Machines That Sometimes Almost Work," in the Personal Computing column in Tuesday's
New York Times
)


Lori Leibovich

Lori Leibovich is a contributing editor at Salon and the former editor of the Life section.

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