VIEWPOINTS : Adam Smith on the Economy : The Prolific Author and TV Personality Discusses the Ongoing Rash of Mergers, the Budget Deficit and George Bush

Question: What do you think the Bush presidency means for the economy? What do you think we have to look forward to?

Answer: Well, we don’t know his economic plans. Mr. Bush was the one who said “voodoo economics” in 1980 but then went along with Reagan. If you hear people on Wall Street talk, they give him enormous benefit of the doubt. They say things like he’s been a businessman and he went to Andover and Yale and his father was a senator. He’s really going to be a terrific moderate Republican we can work with and everything’s going to be fine.

Then if you say, “His first three appointments were Roger Ailes, Dan Quayle and John Sununu, what do you think about that?” they get a little baffled.

Mr. Bush has the presidency but he doesn’t have a mandate. He has a Democratic Congress and the head of the Senate Finance Committee is a Texas senator much better known than he was six months ago called Lloyd Bentsen.

But if I could make up an axiom, it’s that in the ‘80s the markets are bigger than the governments. . . . The head of the Japanese Life Insurance Assn.--and it’s the Japanese life companies that lend us the money to run the post office and pay the nation--said that interest rates are going to be dictated in Tokyo and so will American stock prices.

Since the election there has been some uneasiness. The dollar hit the lowest point since World War II against the yen. It’s like the foreign institutional investors were saying, “All right, we let him have the election, now let’s go.”

Everybody can see what needs to be done, but there are so many corners that have been painted into that the only way to get people out of their respective corners is to have a crisis which dramatizes it.

Q: When you say everybody knows what to do, do you mean raise taxes?

A: No, I wouldn’t say there is agreement. Everybody knows that you have to cut the deficit. That’s where the agreement stops. The Bush side will tell you that federal revenues have increased, why not cut spending? Then everybody says, “Yes, let’s cut spending,” and that’s where the agreement stops. And the whole thing keeps going. People say let’s cut defense. . . . If you cut defense now, it doesn’t show up for four years. It takes seven years to build a carrier. What are you going to do, stop halfway through?

Q: What about Bush’s proposal to cut capital gains taxes?

A: I think it is kind of beside the point whether it would work or not. You need to go back to the drawing board and really reward savings and penalize consumption a bit to get what’s askew righted. As part of it, you ought to think seriously whether pension funds should be short-term speculative traders with no tax penalties. I think there is a very strong case to be made that very short-term gains should be taxed and long-term gains, which are not indexed even for inflation, shouldn’t be. Basically, what you have now is a tax on capital.

Q: What do you think about the reappointment of Treasury Secretary Nicholas F. Brady and what, if anything, do you think it says about policy?

A: He did the crash report and he’s a nice, solid, Wall Street, Dillon Reed, rich guy. You can’t tell. Ahead of time nobody knew Don Regan would turn out to be Don Regan as he turned out to be. Nobody knew Jim Baker would turn out to be Jim Baker.

Q: Do you think the kind of crisis we might have will be a serious recession or a big depression or another crash?

A: Is there going to be a recession? There always has been. This is a long (recovery) cycle and I don’t have any predictive powers.

Q: Are you surprised that it’s been a long cycle?

A: I think it takes awhile to integrate what’s been going on. After things have happened we figure out the reasons. In this case, the computer control of inventories has reduced the swing in inventories that used to be one of the causes of recessions. Will there be another crash? Well, there have always been violent fluctuations in marketplaces. Absolutely no one says there won’t be another crash, especially with all these fancy instruments. But nobody expects it right away. You need unanimous opinion that it can’t happen in order for it to happen and right now, people are still cautious--which means it’s not imminent.

Q: What’s your opinion about the billion-dollar leveraged buyouts and the megadeals of the 1980s?

A: Megamergers are a product of a relaxed view of antitrust. I have a chapter in my book which is already obsolete. It says that Henry Kravis is going to make $400 million without lifting anything heavy. . . . The real intellectual argument is, if you know how to deliver value, why don’t you deliver it for the shareholders? You can make $5 (million) or $10 million, why do you have to make $500 billion? Whose pocket does that come out of?

Q: Your general observations about the coming decade?

A: I have a skepticism about America as a political country and an optimism about Americans. I have two different views of our country as it is run politically and how it runs itself. When I look at the challenges ahead and what’s meeting the challenges, I think it would be a lot easier if we were meeting these challenges more rationally.

But if I look as an investor, I get very excited because new companies are created all the time, new opportunities are created all the time. Some very high percentage of Americans who are interested in investments say what’s the market doing? Where is it going to go and what is the next Administration going to be like and so on, 70% of which is useless information.

(On the other hand,) companies are created every day that really do fulfill specific needs and are very well-run and do their jobs. It’s a thrill to own them and a thrill to see them succeed. Plus you make a lot of money.

There are opportunities because people solve problems on a micro basis, and when they do, they create opportunities for other people. You can’t tell where people come up with ideas. The idea that somebody would form a company to provide a car when your car is in the shop getting fixed is a great idea and an ordinary idea. I think there are pockets of creativity and they bubble up.