McCulley: You're going to see some reversal in this federal government-surplus explosion, versus household-sector saving drop.
Horrigan: It's precisely what should happen. To me, it's the self-evident truth that, if you've had a surplus of investments, you no longer need to crowd in private investment; you need to crowd in private consumption and you do that by effectively giving tax relief for the citizenry.
McCulley: I think we're in the process of seeing some sort of tax-cut adjustment made.
Horrigan: I just regret that they don't do it with material-sort-of size. It seems like there is Calvinism in Washington that simply cannot recognize the situation right now. We should have a tax cut that is on the order of what Mr. Kennedy did, not something that it's a rounding error in a $10 trillion economy.
Simonoff: Does President Bush's initial proposal that meet your definition of, Paul, of the kind of tax cut?
McCulley: I don't think that Mr. Bush's original proposal is adequate to what the economy now needs on a cyclical basis. But, in all fairness to Mr. Bush, and I want to stress, in all fairness, when he and Mr. Lindsey put together the tax package 12 to 18 months ago, the economy was booming, and the Fed was tightening. And if you had tried to put together a tax package 18 months ago and sell it in the campaign on the notion that you needed to have tax relief so as to stimulate aggregate demand, you would have been laughed out of the room.
Simonoff: One final issue here, the public's expectations with the stock market are still, I think, fairly absurd. They've been conditioned from the last five years to expect 20, 30% a year. How long do you think this adjustment process in people's expectations is going to take?
Feinman: I'm not sure about the mentality or psychology and how long it takes people to adjust. Any time I've tried to tell people in the past that over long periods of time, you can expect equity returns to be a whole lot more than, you know, increases in this nominal size of the economy, they look at me like I'm from Mars or something.
Unless you think the profit share of the economy is going to go up. You could have a one-time adjustment to the risk premium that might get you a boost for a while. But once that's gone, interest rates can help for a while. But over the long, long haul, you know, that's what you should expect, not a whole lot more. But it may be a couple of years.
Horrigan: There is a track record, in recession or slowdowns, that a period of aggressive Fed easing tends to be followed by a rebound in the stock market and that the stock market tends to rally before a slowdown or recession is over.