Father of Bush tax cuts: Recession likely

Harvard economist Martin Feldstein says more tax relief, deeper Fed rate cuts needed if U.S. is to avoid recession.

NEW YORK (CNNMoney.com) -- Martin Feldstein, the Harvard economist credited with being one of the fathers of the Bush administration tax cuts, says the U.S. economy is now likely to slip into a recession, and that avoiding one will take a new round of tax cuts and interest rate cuts from the Federal Reserve.
Feldstein is president and CEO of the National Bureau of Economic Research (NBER), the organization charged with determining when the economy is in a recession and when it is growing. He told CNNMoney.com that he had thought the chance of a recession was about 50-50 even before last week.
But he said he now believes a recession is likely, as he pointed to both a report from the Institute of Supply Management showing manufacturing activity in decline for the first time in almost a year, and Friday's December jobs report that showed a jump in the unemployment rate to a two-year high.
He did not give a new percentage for the chance of a recession, saying that will depend on what both the Federal Reserve and Congress and the administration do in response to the weakness.
"It's not just clear that lower interest rates and monetary policy more generally will have enough traction because of conditions in the credit market," he said when asked if the Fed could hold off a recession. "We should have some fiscal stimulus to back that up."
Feldstein made his remarks the same day President Bush gave a speech in Chicago in which he said that economic indicators are "increasingly mixed," and he acknowledged that many Americans are growing anxious about the economy. But the president argued the economy itself is resilient.
The president did not propose any kind of short-term economic stimulus package in his comments, as some had expected, although he argued that it was important not to raise taxes and called for making permanent the tax cuts he passed early in his administration that are due to expire after he leaves office.
Feldstein said he was not surprised that there was no plan laid out on Monday, saying he expects to see it in the State of the Union address. He said an extra $300 tax credit for each tax payer, similar to what was passed in 2001, would only be a good first step this time, and that some kind of deeper cuts might be necessary if the economy starts to lose jobs.
"The precise mix is not as important as a decision that what the economy needs is an additional amount of fiscal stimulus on top of the lower interest rate. That can be a cut in personal taxes, it can be a business investment credit of the sort we had in 2003 or some combination of the two," he said.
Feldstein served as chairman of the Council of Economic Advisers during the Reagan administration. He has served as president and CEO of NBER since leaving that post in 1984, as well as serving on Harvard's faculty. He has given notice that he will be retiring from NBER in June of this year.
Feldstein said that the NBER generally waits at least six months after the economy goes into recession to meet and assign a date to the start of the downturn, and that it is nowhere near ready to call such a meeting. But he said that some stimulus is needed, even if it turns out that the economy continues to grow, albeit at a weak rate.
"What's clear is even if the economy doesn't go into a full scale recession it will be a slow year, one that would benefit from a fiscal stimulus like a $300 (tax credit.) If we're going to actually going to slip into negative GDP, I would want to see more than that."
While he did not serve in the Bush administration, he was an advisor to the campaign and was seen as a leading force in shaping the administration's tax cut strategy, as well as its push to privatize social security. He also served as the faculty advisor for several top members of the Bush administration's economic team when they were working on their doctorates in economics.

AmEx gets CEO pay right

With its new incentive plan for Ken Chenault, the card giant has created a better model for executive comp.

(Fortune Magazine) -- Through a rare alignment of the planets, the subject of CEO pay may get extremely hot in a few months. If it does, I'd advise four key groups - CEOs, board members, government officials, and presidential candidates - to study the remarkable grant of stock options that American Express's (AXP, Fortune 500) board recently gave CEO Ken Chenault. Members of all those groups have made stupid pay-related moves in the past, and here's a lesson in how to avoid doing so again: Chenault's new pay package is a model for how to smartly incentivise a CEO.
The planetary alignment is this: The U.S. economy will most likely be in a deep slowdown or a recession by spring, leaving Americans feeling financially insecure. At just that time, proxy season will reveal that at least a few CEOs got staggering pay despite big problems at their companies. (Remember Hank McKinnell's nearly $200 million exit package from Pfizer last year after the stock fell 40% during his tenure?) And in the midst of it all, presidential candidates will be working intensely for votes. When exactly the same circumstances combined in 1992, one result was the tax law change that makes executive salaries that are more than $1 million a year nondeductible to the company. It pleased voters but distorted pay packages and achieved nothing worthwhile.
Now AmEx's board has figured out a way to give their CEO potentially huge money while making it highly defensible and even laudable. On Nov. 30 the board gave Chenault options on 1,375,000 shares and announced its intention to give him the same number again on Jan. 31. If it all happens as planned, that will be 2,750,000 shares - a mega-grant by any definition. Chenault, of course, has an excellent record running AmEx. (He was on the cover of the Oct. 1, 2007, issue of Fortune, titled "How to Be a Great Leader.")
But the timing is intriguing. On Nov. 30 the Citigroup board was seeking a successor to Charles Prince, and you have to assume that Chenault - with no known subprime problems - was on the short list of candidates. Did AmEx's board dish up a giant option grant to keep him?
An AmEx spokesman will not say whether Chenault was offered the Citi job, only that Chenault had previously made clear he wasn't interested in it. A complex options grant like Chenault's would be almost impossible to assemble and consider on short notice; AmEx's spokesman says it resulted from three months of board discussions. Of course it might have been developed over a period of months and had some zeroes added at the last minute to keep Chenault onboard.
It doesn't matter now. What's key is the way the grant is structured. The first surprise is that it's an options grant at all. Options were all the rage in the '90s as the market roared, but lost favor after the bust. They've been replaced in CEOs' hearts by restricted stock, which is worth money even if the stock price goes nowhere. Since options are worth money only if the stock rises, a big grant is notable at a time when the market looks expensive by many measures and the economy is weak.
Even more striking are the extraordinarily high hurdles the board requires Chenault to clear if he's to get any of those options. To receive the full grant, he must beat several goals over the next six years, an unusually distant time horizon. AmEx's earnings per share must grow at least 15% a year on average, revenues must grow at least 10% a year, return on equity must average at least 36% per year, and total return to shareholders must beat the S&P 500 average by at least 2.5% a year. Chenault can receive a fraction of the grant for lesser performance, but below certain limits, which are still quite high, he gets nothing.
Now consider a couple of scenarios. Chenault misses all the targets but the market booms, returning 10% a year, and AmEx stock matches it. After their full term of ten years, his options would be in the money by $258 million - but he wouldn't get any of that. Why? Well, AmEx's stock presumably rode a rising tide, and his shareholders could have done just as well with an index fund while exposed to less risk. Alternatively, the market returns just 6% a year, in line with what many experts predict, but under Chenault's leadership AmEx hits all the targets and the stock returns 9% a year. Chenault collects a pretax gain of $222 million after a decade - an awful lot, but his shareholders are $35 billion richer than if they had chosen an index fund, and he's a hero.
In either scenario, compensation lines up with performance. That's a goal that CEOs and boards should aim for, and that politicians should vow not to hinder as they try to feel voters' pain this spring.

Gadgetmania

Previewing the future Solar-powered Bluetooth headsets, radio-controlled beer coolers, a $2,000 iPod dock, and it's hard to tell whether it's day or night. Welcome to the Consumer Electronics Show, 2008 version.

Celestron LCD Digital Microscope
$299This microscope, created for consumers and schools, has a 3.5-inch LCD screen instead of the traditional eyepiece, and can use a 2-megapixel digital camera to take photos or video.

E-Detail Dual Display Tablet PC
This South Korean company has a clever idea that makes tablet PCs more useful: why not add another screen? The dual-display PC, which runs Windows XP, allows you to sit across the table from clients and show them your presentation on a big screen. Connect a keyboard, and you can control the action while maintaining eye contact with customers.

Eton G4
$99Eton is a Silicon Valley company that makes old-school radios but sneaks in modern twists. For example, this G4 shortwave radio includes an SD slot for adding memory, and it lets you record broadcasts onto a storage card.

Eton FR 150 Microlink
$30Consider this the ultimate survival radio. Not only does it sport a crank to make sure you can use the built-in radio, LED flashlight and cell phone charger in a pinch, it uses solar power so you can go easy on your wrists.

Globalstar Spot Satellite Messenger
$170 plus $99 per year for satellite service and $49.95 per month for trackingFor people who like taking trips into the wilderness, it won't be hard to justify this purchase. This $170 device uses satellite communication, so if you're in trouble you can send a 911 alert, complete with your location, no matter where you are. Better still, you can send an "I'm OK" message to let loved ones know you've safely reached that mountaintop or remote village.


Interactive Toy Concepts Vamp
$40This is far more annoying than the typical radio-controlled helicopter, and maybe a little more fun. The Vamp is shaped like a bat, and its wings actually flap as it flies around and emits a spooky shriek.

Kreative Power Powramid
$17-$25Power strips can be frustratingly difficult when you're plugging in multiple gadgets. The Powramid, the brainchild of Southern Californian Khanh Lam, solves this by turning the strip into a pyramid, so there's plenty of room to plug in devices. And because it has some shape to it, unplugging gadgets isn't a hassle.

LG BH200
$799If you don't want to pick sides in the high-definition format wars between HD DVD and Blu-ray, LG just made it a little easier to stay neutral. Its BH200, which plays both formats, is now $799. Yes, that's still quite pricey -- but at least you can watch both "Transformers" and "Casino Royale" in all their digital glory.

Logitech diNovo Mini
$150The Logitech diNovo Mini is the gizmo for that small, but growing, number of people who have connected their PC to a big flat panel television or have one of Microsoft's media center setups. It's a wireless keyboard that is small enough to sit unobtrusively on a coffee table, and that allows you to kick back on the couch and operate your PC, and what's on that big screen, remotely. The $150 device connects to a PC (or PS3) via a Bluetooth USB adapter. A Mac version is in the works.

Logitech Harmony One
$250The Harmony One is the ultimate remote control -- you have to try one to understand. Program it to automatically turn on the TV, DVD player and sound system when you want to watch a movie, and add in all sorts of other tricks.

SentrySafe Firesafe Water Resistant Safe
$420 - $520Your jewelry and documents will be OK in the safe if disaster strikes -- but what about your digital files? SentrySafe, a 75-year-old New York company, is trying to blend its security brand with digital smarts to answer that question. This water-resistant safe stores a 2.5-inch hard drive, and even connects it to an internal USB port to keep it charged.

SentrySafe Firesafe hard drive
$260 - $340This is a Maxtor hard drive wrapped in fireproof and waterproof armor. SentrySafe says it can be immersed in water for up to 24 hours, and still function normally.

Sonoro Cubo Elements
$349Sonoro, a German brand new to the United States but popular in Europe, is launching a particularly sweet-looking Internet radio console. Sleek and jet-black with a glowing dial, it's priced at around $349.

Yoggie Pico
$99Yoggie has a novel take on PC security -- rather than deal with anti-virus and parental control software that slows down your computer, just plug in this USB gadget. The Pico might look like flash storage, but it's actually a tiny Linux computer that polices your system. To really lock things down, you can make sure you PC won't get online without the Pico plugged in.

How Bush may boost the economy

Any short-term push to stave off a recession could face political and budgetary challenges.

NEW YORK (CNNMoney.com) -- Word is that President Bush may propose new measures to boost the economy by the time he gives his State of the Union address later this month.
While he has steadfastly maintained that the economy is fundamentally strong, the fact that the president is considering a so-called fiscal stimulus package is an indication that the Administration is getting worried.
Such a package would aim to ward off a recession, the fear of which has grown stronger in the wake of discouraging data on jobs, rising energy prices and a slowing housing market.
There is also an indication that leading Democrats might be working on a plan of their own. A spokesman for Senate Finance Committee Chairman Max Baucus (D-Mont.) said in an e-mail to CNNMoney.com that Sen. Baucus "already has ideas of his own about the possible need for an economic stimulus package this year and is planning for the Finance Committee to discuss very early in the session what shape such a package might take."
Tax cuts on the table
It's not clear what measures the White House is considering, but it is widely believed that tax cuts are among them. In that realm, there are a number of options the president could propose, but all of them carry political costs, economic costs or both.
One option that economist Mark Zandi of Economy.com thinks might help is a temporary tax cut, much like the $300 tax rebate Americans got in the wake of Sept. 11. "It was well-timed and was significant for lower and lower middle-income households," Zandi said, although he acknowledged that not all economists agree about how successful the rebate was.
But a new rebate will likely draw criticism. In 2001, the government had the advantage of a budget surplus. Now it's operating with a deficit, which could raise concerns about the cost of a rebate. "Where's the money going to come from? [A rebate will] take it from some other place in the economy," said Chris Edwards, director of tax policy studies at the libertarian Cato Institute, which advocates for limited government and free markets.
Zandi thinks it might also make sense to make President Bush's income tax cuts for the middle class permanent, a move that leading Democratic presidential candidates have indicated they'd support. Where they part company with the president, however, is in making those tax cuts permanent for high-income households, too. So if the president did push for an extension of his tax cuts for the middle class, that could undercut his stated goal of making his tax cuts permanent for everyone, Zandi said.
Zandi would also advocate making the lower rates on capital gains and dividends permanent for everyone. Despite his belief that the federal government should not try to control the short-term performance of the economy, Edwards agrees that such a move could help stabilize the markets by giving investors more certainty about their investment tax bill. It also would reduce any pressure investors might feel to sell their holdings before the investment rate cuts expire.
But the cost of making any of the Bush tax cuts permanent is a sore point for fiscal watchdogs, who contend such cuts are unaffordable in the long term, given the growing budgetary demands of Social Security and Medicare as well as the war in Iraq.
Of course, with any tax-based stimulus, the potential benefit of its short-term effect has to be weighed against its long-term cost, said Clint Stretch, a federal tax policy expert at Deloitte Touche. "[You must consider the net benefit] if you have to turn around to the credit markets and borrow the money to pay for it."
Non-tax options
President Bush could also call for measures intended to stimulate the housing market, Zandi said.
Bush has already said Congress should act quickly to pass a number of housing-related legislative proposals that he supports. One key measure would reform the Federal Housing Administration (FHA), which would make the relatively low cost FHA-insured mortgages more readily available to consumers who want to buy homes and to those who want to refinance out of unaffordable subprime loans.
The White House also might consider calling for a temporary increase in the size of mortgages that Fannie Mae (FNM) and Freddie Mac can purchase from mortgage lenders. These two government-sponsored enterprises guarantee the purchase and trading of so-called "conforming" loans, which are those valued at $417,000 or less. Any loans above that amount are considered "jumbo" loans.
An increase in the conforming loan limit would make it easier and less costly for borrowers in high-cost areas to get loans because Fannie and Freddie would guarantee their purchase by investors.
In the past, the Administration has said it would support a temporary increase in loan limits, but only if lawmakers pass legislation that would boost oversight of both Fannie and Freddie, which have been plagued by accounting scandals.

Best Bosses

Richard CaturanoCompany: Vitale Caturano, BostonStrategy: It's not unusual for employees of accounting firms to spend more time at work than they do at home during tax season. To ease the stress on the 300-member staff of his public accounting firm, president Richard Caturano offers workers free gourmet dinners and Saturday lunches during the busy season.For those who don't have time to fuel up at home, there is a year-round, complimentary breakfast buffet with free espresso. A concierge service handles staffers' errands, such as picking up dry cleaning, laundry drop-offs and visits to the auto shop.And when employees do have spare time, the company makes it easy for them to give back to the community. It provides free or low-cost access to charity events. Perhaps it is not surprising that the company is so generous to its team. It is 100% employee-owned.

Paal GisholtCompany: SmartPak, Plymouth, Mass.Strategy: While many CEOs rely on Monster.com, Paal Gisholt prefers to find employees for SmartPak, a maker of equestrian products, at horse shows and university equine-studies programs.Since he founded the company seven years ago with his wife, Gisholt estimates that he and his HR team have attended 85 horse shows and built relationships with 15 equine-studies programs.Ashley Wener, 22, who received a degree in animal sciences from the University of Vermont, sent her résumé to SmartPak after a professor recommended the company to her. She joined SmartPak in June and now works as a product specialist in the sales department.Her 3.67 GPA helps, she says, but Wener has expanded her knowledge of horses since Gisholt hired her. "I'm constantly learning," she says.Sales at SmartPak grew from $15 million in 2004 to $23 million in 2005, and the company recently expanded into selling prepacked daily helpings of all-natural dog food.Don't be surprised if Gisholt starts scouting for talent at the Westminster Kennel Club Dog Show.

Mellody HobsonCompany: Ariel Capital Management, ChicagoStrategy: Ariel prides itself on its slow and steady approach to investing. The investment firm, which runs three mutual funds and has $17 billion in assets under management, uses the same strategy to advance its social mission: educating African-American kids about investing.Its 97 employees reach out to Chicago children through Ariel Community Academy, a public school that the firm helped the city found and that it supports with help from two financial firms: John Nuveen and Lehman Brothers.Each first-grade class receives $20,000, which Ariel invests equally in its Ariel fund and the Nuveen Rittenhouse Growth fund.Hobson, the company's president, gives regular lectures at the school to both students and their parents on topics such as saving and investing, and she came up with the child-friendly statements that each student receives on the $20,000 investment.Says Hobson: "Ariel Community Academy allows us to attract like-minded employees who have a sense of community."

Graham WestonCompany: Rackspace Managed Hosting, San AntonioWhat's the best way to keep a young company in the fast lane? Weston, co-founder and CEO of Rackspace Managed Hosting, based in San Antonio, hands top performers the keys to one of his cars, a BMW M3 convertible, for a week. Finding creative ways to recognize the stars on his 1,000-employee staff has helped Weston grow annual sales to $139 million at seven-year-old Rackspace, which hosts web applications for other firms."I think it's one of the biggest bargains in business," Weston says. "If you gave somebody a $200 bonus, it wouldn't mean very much. When someone gets to drive my car for a week, they never forget it."For extra recognition, he offers workers the use of a guest house he owns on the Comal River in New Braunfels, Texas, where the water is 72 degrees year round."You know if you work hard, Graham sees it and will take care of you," says David Bryce, 34, vice president of customer care at Rackspace. "You don't have to worry about fighting for yourself to get what's 'due' to you. It's not a lot of fun working for a boss who doesn't give you a raise unless you ask for it."Weston also offers flexible arrangements for employees working through personal problems. When Bryce, who joined Rackspace in 1999, was struggling to cope with a divorce, Weston offered him several months of paid leave, which he gratefully accepted. "I would do anything for Graham," he says.

David WilliamsCompany: Merkle, Lanham, Md.It's just as tough for employees to stay competitive in the marketplace as it is for companies. To help his 850-member staff keep their skills sharp, David Williams, CEO of this database marketing agency, requires them to take classes on subjects such as computer programming, business writing, public speaking, and best practices in their field at the firm's The Merkle Institute of Technology, founded in 1990.Classes are taught by their colleagues, offering lots of opportunities to cross-pollinate ideas with folks in other departments. Classes don't cut into employees' personal time, because they are scheduled during business hours.To make sure the firm's commitment to employee-education is clear, Williams requires each member to earn a certain number of credits and, in some cases, to teach a certain number of hours to be eligible for an annual raise. The firm, which is 80% employee-owned, holds him to the same standard.

How good a boss are you?

After 34 years in the attitude-survey business and thousands of employee polls, David Sirota knows what your subordinates want. Do you? Check this out, then take our quiz.

NEW YORK (Fortune) -- "A large part of what a good boss does is expedite things for employees - that is, help them get their jobs done by removing obstacles. This is not at all the same as 'making sure' they get their jobs done by raising the anxiety level. Most people are anxious enough already." So says David Sirota, head of Sirota Survey Intelligence, a research firm headquartered in Purchase, N.Y., that has surveyed millions of employees in Fortune 500 companies since its founding in 1972.
Along with two co-authors, Sirota has summed up what the firm has discovered in a new book, "The Enthusiastic Employee: How Companies Profit by Giving Workers What They Want" (Wharton School Publishing, $26.95). We recently spoke about how to tell whether you're a good boss or a bad one. Some excerpts from our conversation: To start with the most basic question: What makes a good boss, in employees' eyes?
All of our research consistently shows that people in general have three goals at work. First is fairness. They want to feel that they're being recognized and rewarded fairly for what they contribute. Second is achievement. People want to be proud of the organization and of their place in it. And third, camaraderie, meaning good working relationships and a sense of belonging to a team. If these three goals are met, you have enthusiastic employees.
The trouble is that, in most companies, morale among new hires is high and then, by about the six-month point, it has dropped sharply. Management has destroyed it. One thing bad bosses do is to deliberately make people feel insecure about their jobs. Another is, treat employees like children or criminals instead of like responsible adults.
A sign of a really bad boss is micromanaging, which I define as devoting punitive amounts of attention to minutiae. We've seen workplaces where people have to raise their hands if they want to go to the restroom. Another sign of a bad boss is when you hear employees say that they get no positive feedback at all. A common complaint is, "If we make a mistake, we hear about it, but for doing our jobs well, there is never a 'thank you'."
Just to play devil's advocate for a minute here, let me ask you this: Why should companies care whether employees are enthusiastic or not, as long as the work gets done?
Well, there is plenty of persuasive evidence of a direct link between employee morale and the overall performance of the company, including its stock price. That correlation seems to be a result of enthusiastic employees treating the company's customers particularly well. All of us at one time or another have dealt with an apathetic or even hostile customer-service person or salesperson and, by contrast, with someone who's enthused about his or her work. Enormous difference! A good or a bad direct boss is most often responsible for that.
And it can make or break a company's reputation. We recently did some work with the Mayo Clinic, whose prestige among patients and fellow practitioners comes partly from its employees' enthusiasm. We met nurses there who come in on their days off, just to check on their patients - not because they have to, but because they want to. But it's not just in the life-or-death medical profession that enthusiasm matters. We also worked with Keebler, and there was tremendous dedication and high morale there. People are pleased to be making a product that customers enjoy.
Don't most bosses - even rotten ones - think they are doing the right things? If you are a manager, how can you tell if you're a good boss or a bad one?
The surest way is to ask your people for feedback. How do they think you're doing? This is why 360-degree evaluations are so useful, because they give people the chance to offer you some constructive criticism. If your company has no formal 360-degree program, you have to seek out people's opinions yourself, and you may be glad you did. But you have to be careful how you ask, because people often are afraid to be honest with the boss. So you may need a bit of training in how to open the discussion so that you can actually learn something from it.

Best Bosses

Five leaders who use innovative strategies and rewards to motivate employees.

NEW YORK (Fortune Small Business) -- You can offer all the benefits in the world, but the one that matters most to employees is a piece of the action.
Of the 18 honorees in Winning Workplaces' fourth annual Best Bosses competition, 14 run companies partly or completely worker-owned.
That reflects a broader trend. The National Center for Employee Ownership estimates that 9,225 companies were offering stock-option plans, stock bonus plans, and profit-sharing plans as of July, up from 7,600 in 1999.
How good a boss are you?
Winning Workplaces is a nonprofit in Evanston, Ill., that helps small-business managers improve their communication skills to make workers more productive and happier.
It assembled a team of respected judges, who culled the 80 applicants by looking at factors such as employee satisfaction ratings and by interviewing workers. The result? Eighteen Best Bosses - 17 from commercial companies and one from a nonprofit.
From companies that offer free gourmet dinners during crunch times to a boss who lends top performers the keys to his convertible, see five of the winners and what makes them stand out.