TCS Daily

An Interview with R. Glenn Hubbard

By Duane D. Freese - May 28, 2004 12:00 AM

As he prepares to become the dean of Columbia Business School, Duane Freese of TCS sat down with former Chairman of President Bush's Council of Economic Advisers (CEA) R. Glenn Hubbard to discuss the his new job, the economy, the election and telecommunications.

TCS: Now that you've left the Bush administration and are back in academia, what do you look back upon with the most pride in your three years?

HUBBARD: I am proud of the president's focus on sound tax policy and on managing risks from the recession and terrorist attacks. Tax policy changes under the president's leadership are consistent with fundamental tax reform.

TCS: What was your biggest disappointment?

HUBBARD: My biggest disappointment is the lack of spending restraint (in particular, the recent Medicare expansion in the absence of meaningful reform).

TCS: The CEA took a lot of heat for its "rosy scenario" forecasts over the past couple of years. Have the numbers been better or worse than you thought they would be.

HUBBARD: I don't have all of the forecasts we made right in front of me, but, generally speaking, I would have to say the economy is doing much better than anyone thought possible a couple of years ago. Economic growth is very high right now, and there is an enormous amount of momentum. I am especially impressed with the recovery in business investment spending and the pick-up in hiring. America's businesses are clearly very optimistic about the future.

TCS: What effect do you see current high oil prices having on the recovery?

HUBBARD: Higher oil prices are a headwind, but will almost certainly not derail the recovery. A good rule of thumb is that a sustained increase in the price of oil of $10 for a year could trim about 0.3 percentage points from real GDP growth.

TCS: John Kerry (the presumptive Democratic Party nominee for president) has suggested opening up the reserves to lower prices. Would that do any good?

HUBBARD: I do not believe this would be warranted; Kerry's suggestion, indeed, seems simply politically motivated. The Strategic Petroleum Reserve should be used strategically - in cases in which supply disruptions lead to lack of availability of particular grades of oil.

TCS: Federal Reserve Chairman Alan Greenspan has indicated that it will likely increase interest rates. That seems to have sent shivers through the stock market. What effect do you see from an interest rate increase?

HUBBARD: The effects are likely to be modest as long as the Fed communicates clearly what its intentions are. As long as market participants believe the Fed is committed to price stability and the Fed prepares markets for the eventual change, the adjustment should not be bumpy.

TCS: Should the administration do anything to offset the increase?


TCS: What do you see as other looming issues between now and the election?

HUBBARD: There are a couple of important things that will happen between now and the end of the summer. First, the House and Senate will have to work out a solution to the difficult Foreign Sales Corporation (FSC) issue. Second, telecommunications policymakers will have to figure out what to do if the companies that are currently involved in negotiations to end the unbundling dispute fail.

TCS: What needs to be done on the FSC bill?

HUBBARD: On the FSC bill, I would have to say that the President may face a difficult choice. The Senate bill is loaded with rifle-shot tax provisions that lack the coherent, principled vision for reform the President has articulated. However, European tariffs will become increasingly harmful if nothing is done. It will be a tough decision for the economic team, which has until now seemed to be quite supportive of the more economically rational approach taken by House Ways and Means Chairman Bill Thomas.

TCS: A lot of our readers follow telecom issues closely. Do you think the commercial negotiations called for by the Federal Communications Commission can succeed or will the courts have to decide?

HUBBARD: Commercial agreements are preferable to regulation, so the companies' agreement to try to negotiate the disputes that have dominated telecom policy for the past eight years is a positive development for which the administration deserves credit.

Some of the participants have demonstrated new flexibility. Unlike the other Bells, Qwest has agreed to public negotiations with the assistance of a mediator and also says it considers wholesale an appealing business. On the other side, AT&T and MCI have signaled a desire to move to facilities-based competition, reducing their reliance on RBOC infrastructure -- as the Bells have long said they wanted. FCC Chairman Powell said AT&T's proposal was "important and significant." Still, we have to ask if the bargaining solution will work.

From an economic point of view, there are a number of important tests that the bargaining outcome should pass. Will it extend current unbundling long enough for competitors to gain a large enough foothold to expand facilities based competition? Will it lead to more facilities-based competition? Will it add certainty that is required to spur new investments? Will it benefit consumers? Will it help drive employment in the sector and more broadly in the economy?

TCS: What do you think?

HUBBARD: It is still too early to tell. In business school, we discuss such bargaining situations all of the time. Indeed, one might argue that a primary objective of business school is fostering competent bargaining skills. Clearly, the ball is in the court of the BOCs. The BOCs have dominant market positions in local telephony because they own the last mile of wire to virtually every home in America.

TCS: Given the power shift created if the D.C. Court ruling stands, why should the BOCs bargain?

HUBBARD: The answer is obvious. If the BOCs reach genuine commercial agreements with their key competitors, then the FCC and the Bush administration are unlikely to challenge the court ruling and will also back off from further regulation.

But if the BOCs make true competition impossible, the administration might decide it has to appeal the D.C. court decision, and the regulator might decide that full-fledged telephone monopolies have reemerged and attempt to seek new remedies.

TCS: How as a business will the BOCs assess the matter?

HUBBARD: The BOCs have to assign probabilities to the different possible scenarios. If they are sure that the administration and the FCC will not appeal the ruling, they lose much of their incentive to bargain. If the BOCs are confident that they can delay future attempts to intervene in their business practice, then along this end of the decision tree, they can offer to lease their equipment to competitors at prices substantially higher than the current regulated rates and not care if their offer is refused. Indeed, their public offers to date have taken this approach - proposing increases of 30 percent or more.

If, however, the BOCs believe that the FCC and the administration will appeal or regulate in the future, another set of probabilities must be considered. If the Supreme Court overturns the D.C. Circuit's ruling, then the old rules stay in place and the BOCs will be forced to lease elements at prices that are lower than they could likely win in negotiations.

So, the ball really is in the BOCs' court. A deal at the bargaining table will bring them higher returns than they have now. But, if the court ruling stands, they can likely drive prices higher than with negotiated deals.

TCS: What can the administration do?

HUBBARD: If the goal is commercial agreements, the only thing that levels the bargaining table is the threat that current rules may stay in place. That makes it highly advisable that the Administration seek to extend the bargaining period by requesting a Court stay and asking Supreme Court review as the current deadline nears.

TCS: Looking further down the road, what are the big issues that will face this administration in its next term or a new administration in its first?

HUBBARD: At home, we face big challenges in the need to reform entitlements, health care policy, and the tax code. Abroad, we need to carry out an agenda of promoting economic growth and clarifying the role of international financial institutions.

TCS: And what about you and your new job?

HUBBARD: I am excited about the opportunities at Columbia Business School. Business schools should be vibrant places where ideas can be translated into business practice at home and abroad. I will work on enhancing our faculty, and helping students become better problem solvers.



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