CNBC "Kudlow & Company"-Transcript

Interview

CNBC "Kudlow & Company"-Transcript

MR. KUDLOW: Welcome back, everybody. We were talking about the stock market. Now the question is, how is the budget battle going to affect the stock market? The budget battle in Washington -- we're talking taxes, we're talking trade, we're talking spending. It's all very important. Joining me now is Senator Ron Wyden, Democrat from Oregon, Senator Judd Gregg, Republican from New Hampshire.

Gentlemen, welcome, thank you very much.

Mr. Wyden, let me start with you. A little sort of nasty piece from our friend Grover Norquist of Americans for Tax Reform. He says that congressional Democrats are launched on a tax-and-spend orgy, and he is particularly focused on the S-CHIP debate and the cigarette taxes to finance it. A tax-and-spend orgy -- you want to weigh in on that, please?

SEN. WYDEN: Larry, I'm glad Grover is supporting my legislation to ban multiple and discriminatory taxes on Internet commerce, but he's off base on the budget. This budget is really about priorities. And the bottom line is that the president of the United States wants to add nearly 10 times as much in spending as he's insisting that the Congress cut.

MR. KUDLOW: Ten times -- really? Where does that come from? I haven't heard that before.

SEN. WYDEN: He wants to add $200 billion in additional spending for the war in Iraq. And frankly, we need some truth in budgeting with respect to the Iraq war. And Judd Gregg has been pushing it. Then he wants to have the Congress cut $22 billion in domestic spending.

MR. KUDLOW: All right. Senator Gregg, we're going to have some breaking news in a minute. Would you just quickly weigh in on what Senator Wyden just said -- 10 times the spending?

SEN. GREGG: Well, that's inaccurate, in my humble opinion. If you look at the Democratic budget, it proposed $450 billion in new taxes, $255 billion in new spending. And they're on a path to hit both of those numbers there. They've got proposals to significantly increase taxes, and they've got proposals to significantly increase spending.

MR. KUDLOW: Senator Gregg, is the military appropriations in your numbers, the ones you just quoted?

SEN. GREGG: Yes, but what you've got to remember, of course, is that we're fighting a war. We're going to have to pay for the war. That's a given. But what's happened so far is that we've reduced the deficit dramatically, because we've put in place a tax law which is fair and which has promoted the creation of capital and the creation of jobs as a result. The deficit's dropped from about $500 billion down to under 200 billion (dollars) -- about 170 billion (dollars).

MR. KUDLOW: Please just hang with me fellas. We've got some breaking news from the Philadelphia Fed President Charles Plosser.

(Interview pause.)

MR. KUDLOW: Let me swing back.

Senator Gregg, are they talking recession up your way in New Hampshire? Are they talking recession? Are they worried about this credit crunch? Are they worried about what the Federal Reserve's going to do?

SEN. GREGG: There's concern. The economy's doing fairly well in New Hampshire. But you talk to the people who are selling cars and people who are building houses, although they see a fair amount of activity, they're obviously worried about where the economy is heading.

MR. KUDLOW: And Senator Wyden, when you all make these decisions, arguing on the budget, arguing on taxes, which I appreciate, are you factoring in, a, an economic slowdown, b, a possible recession? It seems to me those are the best options right now -- a possible recession but more likely an economic slowdown. So when you go through these numbers, is that a factor? Do you think about putting some stimulus in?

SEN. WYDEN: Absolutely, Larry. And the fact of the matter is that's why it's so important that the country get these budget numbers right, because it sends an important psychological message that we're in a position to deal with global economics at a critical time. And we're going to spend, for example, $22 billion more on this surge. We're going to add $200 billion on Iraq spending. I don't think that's a good set of priorities right now.

MR. KUDLOW: But don't we need this? I mean, don't we have to support the troops through the new Petraeus strategy?

SEN. WYDEN: I personally think it's time to set a concrete timetable and start bringing our folks home. That's what I hear at home. And people at home who are concerned about the economic picture are saying let's take steps now to make some critical investments in areas like transportation and education and health, because that's what we need to grow the global economy for the United States.

MR. KUDLOW: Senator Gregg --

SEN. GREGG: Larry, if I could just respond to that quickly.

MR. KUDLOW: Yeah.

SEN. GREGG: You know, the fact is we have troops in the field. They're putting their life on the line every day for us. We have to support them, and yes, it does cost a lot of money. But what the Democratic proposal is and what the liberal agenda is is to dramatically expand the size of government on top of fighting the war. And quite honestly, we can't afford that. The president has said he's not going to allow this additional spending. And yes, we're talking about $22 billion difference. But in New Hampshire, $22 billion is real money.

MR. KUDLOW: But there is a cigarette tax increase on the table, a significant tax increase.

Senator Gregg, your colleague Senator Grassley who is a frequent guest on this program -- we are grateful for that -- he said in The Washington Post this morning he is ready to vote for the Democratic proposal for the S-CHIP and the accompanying cigarette tax that goes along with it. I just want to ask a question on this. Not health care but macroeconomics, gentlemen. Is this the right time to be raising taxes of any kind?

Senator Gregg, you first.

SEN. GREGG: Well, I'm not for raising. But I will also say this. In an S-CHIP program that's supposed to be directed at poor children, what basically you've got here is a program where people earning up to $71,000 a year and who don't have children can get a benefit.

We should confine that program to poor children and cover those poor children under 200 percent of poverty. And that would be a fair and reasonable program, and it would be an affordable program. What we're seeing here is an explosion in the size of that program, and it's an example, unfortunately, of the rate of growth of government that's occurring under this new Congress. We're seeing a lot of new program, a lot of new spending. And you just can't say let's take it from the warfighting effort and pay for it, because there are people in the field who need the money if they're going to be putting their lives on the line.

MR. KUDLOW: On the narrow point of the cigarette tax, all right -- I guess -- I don't know what it is -- 30 (billion dollars), $35 billion -- cigarettes --

SEN. WYDEN: Sixty-one cents. But here's the point --

MR. KUDLOW: Is this the right time to raise any taxes whatsoever?

SEN. WYDEN: Larry, I hear from a lot of supply-siders that they have no problem with a tax on something like this that's designed to discourage consumption of a product that we end up paying big sums for in terms of --

MR. KUDLOW: Incentive effect.

SEN. WYDEN: -- yes, in terms of treating illness. And I think it really does come down to a question of priorities. I want to make sure that every single one of those troops who are in the field that Judd correctly talks about gets the equipment and the assistance they need. But the president is talking about committing us in to the next administration. We think that that's a mistake.

MR. KUDLOW: Senator Gregg --

SEN. GREGG: Larry, let me make a point here.

MR. KUDLOW: Yeah, go right ahead.

SEN. GREGG: You know, let's not get hung up on the cigarette tax. It's a big number, but it's a small issue in the overall context of what's happening in this economy.

MR. KUDLOW: Yeah, but it's sending a message. It's sending a message!

SEN. GREGG: No, no, what we're talking about is the Democratic Party that wants to eliminate the capital gains rates, take them back up to the ordinary income rate, take the dividend rate back up to the ordinary income rate. Those are actions which are fundamentally going to harm this economy. And every presidential candidate on the Democratic side is proposing that. And that's basically where they intend to get the money to fund their domestic agenda which expands the size of government. And believe me, when you start raising the capital gains rate, you're going to reduce the economic activity in this country, and you're going to reduce the number of jobs rather than expand the economic activity and thus create more revenue for the federal government.

MR. KUDLOW: That's a big point right there. Now, there are a lot of rumors --

SEN. GREGG: That is the big point! (Laughs.) That's the big point!

MR. KUDLOW: There are a lot of rumors, Senator Wyden, that the alternative minimum tax fix is, one way or another, going to raise the capital gains tax and we'll have a higher tax on upper-income earners as well as possibly private equity and hedge funds. Now, that strikes me as totally the wrong medicine for an economy which is softening.

SEN. WYDEN: I can tell you, Larry, and our listeners that Senator Baucus who chairs the Finance Committee hasn't made that kind of commitment. He's looking at the full range of options. As you know, I have something, I want to get Judd on it, the fair flat tax where we can go back to the 1986 principles, clean out some of the clutter in the tax code, hold rates down for everybody, keep some progressivity and do what Ronald Reagan and Bill Bradley talked about. And I've got to get Judd to go on it.

MR. KUDLOW: What do you think, Mr. Gregg?

SEN. GREGG: Well, you know, Ron's the wrong person to debate this with, because he actually has some reasonable ideas and some rational ideas on tax policy. But you look at Senator Obama, you look at Senator Clinton, you look at former Senator Edwards, they're all proposing dramatically raising the tax rates on capital gains and on dividends and on the upper brackets in exchange for taking those dollars and expanding the size of government. Now, that does not create a stronger economy, a more robust economy. It doesn't create more jobs. It doesn't create more revenues for the federal treasury. It will actually dampen down our economic activity in this country radically, in my opinion.

SEN. WYDEN: Larry, the key opportunity now is for some bipartisanship on the key issues -- health care and taxes. For example, I've got legislation, the Healthy Americans Act, the first bipartisan, market-oriented approach to fixing American health care. Judd's on it. We're trying to get Democrats and Republicans. When we get by this CHIP legislation and make sure that our kids are protected, then we're going to get a bipartisan effort to finally fix the overall health care.

MR. KUDLOW: I'm just not with you on this CHIP expansion. But we've lost Senator Gregg. Let me just ask you on the way out. President Bush today before the U.N. made a very strong plea for free trade. We have a bunch of amendments on the floor -- what, Peru, Colombia, some other places, South Korea. Can we get that? Free trade is like a tax cut. It's pro-growth. Are you for it? Can that stuff get through?

SEN. WYDEN: Larry, I already voted for it in the Senate Finance Committee. I think the name of the game in the global marketplace is we ought to grow things, we ought to make them here in the United States. We ought to add value to them. We ought to ship it to them. That means we've got to have free and open markets.

MR. KUDLOW: Ah, that's great.

Senator Gregg, you agree with that?

SEN. GREGG: Oh, absolutely. Free trade is the way, at least in New England, that we create jobs and create economic activity, because we're better people at competing with the products that we make than other countries. So we want to be able to sell those products to those other countries.

MR. KUDLOW: Senator Gregg, why do you think the Treasury Department put out a statement today -- it's in The Washington Post. They want to rework entitlement reform, which just seems so hopeless. And on Social Security, they say well, we either raise taxes or cut benefits or both. Do you have a real quick response to that? Is this kind of thing going anywhere?

SEN. GREGG: Well, actually, Senator Conrad and I introduced this week a proposal to make it go somewhere, to basically have a fast- track commission which is made up of members of Congress and the administration who would come back with a proposal on Medicare, Social Security and basic tax policy which would correct those institutional problems we have there and require and up or down vote. It's a way to approach this, and it's the way I think we can get progress.

MR. KUDLOW: A quick response on the Social Security reform.

SEN. WYDEN: I'm for the Conrad-Gregg proposal. There's no question that's exactly what we need right now. Pay-as-you-go has been useful. We ought to go on to the bipartisan effort Kent Conrad and Judd Gregg are talking about.

MR. KUDLOW: Senator Wyden, you are truly a pro-growth Democrat.

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