There was a full house at Louie's for the second in the Friends of the Port Washington Library Cabin Fever Series. Dr. Irwin Kellner, a Port resident and one of the nation's most respected economists and prognosticators, shared his insights on our uncertain economy.

Dr. Kellner began by introducing some of his colleagues from North Shore Bank, where he is currently chief economist. He opened by saying, "I am here to discuss the state of the U.S. and local economy, the stock market and anything else you think I can handle." Cutting directly to the chase, he described the current economy as in a "'twilight zone,' stuck between a full-fledged recession and a full blown economic recovery."

Kellner, who is also chief economist for CBS MarketWatch and Augustus B. Weller Distinguished Chair of Economics at Hofstra University, said that since January 2001, the economy went down during three quarters and expanded for five quarters. The growth, however, was, and continues to be, unusually weak, and is accompanied by a significant decline in employment. "You don't have to go too far," he said, "to read about the impact -- New York magazine, The Wall Street Journal." He added that it is significant that this time the unemployment is affecting managers and professional and technical people at an unprecedented rate. "Over one-fifth of the unemployed," he said, "consists of Wall Street types, architects, and so forth." Kellner reminded us that the unemployment figures do not include those who have been out of work so long that they have stopped looking for a job.

Kellner was not sanguine about the near future. "The outlook is murky," he said. He identified what he considered the major factors that are holding the economy back. Two of the main ones are the high cost of health care and the problems of state and local governments. He said that 47 of the 50 states currently have operating deficits, which will likely result in their raising taxes because the state constitutions typically mandate a balanced budget. "The last thing we need," he said, "is a raise in taxes. It takes buying power out of our pockets." Kellner also cited the declining stock market, which fell for the third straight year for the first time since the late '30s, causing the loss of trillions of dollars. In addition, there was the bursting of the "dot com" bubble. Both of these have led to an erosion of consumer and investor confidence. Kellner added that there are other "bubbles" that could burst any time: consumer and corporate debt, which are at all-time highs; the "bond bubble," caused by hordes of investors moving money from stocks to bonds; the increased demand for housing with relatively few new homes being built; and the high oil prices, which could drop very sharply. He asked, "If the bond market bursts, can the housing market be far behind?"

Kellner pointed out that these factors are independent of the current geopolitical situation. "I want to stress that all of this transcends anything that could happen in Iraq or North Korea. "Even if we captured bin Laden tomorrow, finished off Iraq on Tuesday and North Korea by the end of the week, we would still be in a mess of trouble." In addition to the aftereffects of the "bubbles" of the 1990s - the booming stock market and technology -- there is also the problem of companies that have excess capacity, do not have enough cash to invest, and are facing a decrease in pricing power. "A combination of excess capacity and insufficient cash flow will make it difficult for companies to step up to the plate, no matter what happens geopolitically." Add to this the erosion of investor confidence because of scandals in companies like Enron, Arthur Andersen, ImClone, and Dutch giant Ahold. "It will be a while before investors believe what they hear," he said. Kellner, who serves as a director of Claire's Stores, Inc., commented, "I can tell you that we are holding their feet to the fire to ensure that our financial filings are accurate." He believes that many other corporations are doing the same, and that the majority of corporations are honest.

Kellner expressed dissatisfaction with the economic policies of the current administration, which he believes are analogous to the policies that created the great depression. He said that the Federal Reserve is not letting interest rates go as low as they should. The Bush plan to cut taxes on dividends, Kellner said, "does not get money into the hands of the people who need it right now. Dividend taxes are a long-range proposition." In addition, he said that the President is not giving significant help to state and local governments, thus forcing them to raise taxes, which reduces consumer spending ability. Further, he said, "this administration came in committed to free trade and the first thing they did was put tariffs on steel. Tariffs prompt other countries to retaliate, and reduces our ability to sell abroad." He conceded that low interest rates make it easier to borrow, but added "that can be problematic."

In spite of these somewhat pessimistic predictions, Kellner said, "All is not bleak." He pointed out that we have a high level of employment - 94 percent - and are enjoying an increase in buying power because of lack of inflation. We have the lowest interest rates in 40-plus years, which make it easier for those who want to buy a house. The housing market is very strong, with housing prices going up faster than family income. Overall, productivity has increased, which is a good thing, but Kellner pointed out that the flip side is that companies can do more with fewer people, which "sooner or later will come back to hurt them." Another positive factor is that the dollar is weak in comparison to the Euro and the yen, which tends to increase exports and help tourism, and is good for U.S. manufacturers who compete with foreign-made goods.

Kellner summarized with some predictions. He said, "The Iraq situation should be settled soon. The temperatures are warming up and our troops cannot deal with heat, sandstorms, and protective gear for too long." He pointed out that the stock market is still high in terms of price/earnings ratio - at 29, almost twice the historic ratio. He said, "When you have a bear market, it usually goes below the long-term average. The only way this can happen is for profits to double or for prices to go in half. I'll leave it up to you to decide what you think is more likely." Kellner pointed out that we are in a pre-election year, and for 50 years, the stock market has gone up in a pre-election year, because the president in power does everything that he can to push the economy ahead. "Let's hope this happens this year," he said. Kellner said that the stocks that will do best are the "good old-fashioned value stocks" -- those that have a track record of earning money and paying dividends. Kellner predicted - and hoped - that the Federal Reserve will again lower interest rates. "Greenspan needs to see the real world," he commented.

Kellner, who serves as chair of County Executive Thomas Suozzi's Council of Economic Advisors, commented on the Long Island outlook. "Suozzi has done an awful lot in a year and a half," he said. "He has recruited large numbers of volunteers like me to help get the county back on a sound financial footing. He came up with a budget surplus of $40 million the first year, and we hope that this will continue." Kellner added that Nassau's fiscal health is to some extent dependent upon the state. He opined that we are in somewhat better shape than New York City and the rest of the state - Nassau has experienced strong growth, and its jobless rate was under four percent, lower than the City and the rest of the state. "Here in Port Washington, he said, "we are doing well. The storefronts on Main Street are pretty well filled up." He referred the listeners to the Port News interview with him published in the November 22, 2002 edition.

A wide range of issues were raised during the question-and-answer period. In answer to the first question, he said he believes that banks are in good shape in spite of low interest rates because they are well capitalized, and there is a good spread between the interest that they pay to borrow, and what they charge to lend. He predicted that housing prices will stabilize and may drop slightly. Another participant thought that the SEC had soft-pedaled those corporations that had filed false financial reports; Kellner disagreed, saying, "There will be indictments, examples will be made of people who abused the public trust. This administration cannot afford to soft-pedal it; it takes a long time to build confidence." Another person asked about independent sources of investment advice that "don't cost a fortune." Kellner responded with the adages, "There is no such thing as a free lunch." and "You get what you pay for." He cautioned that any company that sells research but not products can be objective, but "independence does not guarantee quality." Two sources he recommended are Value Line and Sanford Bernstein.

In response to another questioner, Kellner said that when he was in grade school and high school he wanted to be a car designer. "My fondest memory of cars," he said, "was my friend's rich uncle's 1949 Cadillac with the big tail fins." It turned out that the schools he applied to did not believe his talents lay in that direction, so he ended up at Brooklyn College, where he majored in Economics and Political Science. "Initially, I thought I would get into the automobile industry through the business side," he said. After getting his BA and MA from Brooklyn College, he went on to complete the Ph.D. at the New School for Social Research.

Kellner and his family have been residents of Port Washington for over 30 years. He has been active in local affairs and has served for many years as a member of the Port Washington North Village Planning Board. He was the village's first commissioner of Historic Landmarks. Beginning his career as a financial journalist with Business Week, he worked in the banking industry for many years, serving as chief economist with Chase Manhattan Bank and its predecessors, Chemical and Manufacturers Hanover. When he can spare the time, he enjoys golfing, and had good things to say about our new Harbor Links golf course.

Amy Bass, president of Friends of the Library, thanked Ellen Zimmerman, chair of the Cabin Fever subcommittee. She added that they are beginning to line up speakers for the next Cabin Fever series. "People like to hear from locals," she said. "They use our library, they eat at Shish Kebab, they are one of us." She pointed out a special "Sandwiched In" event on Friday, March 28 at noon, when legendary jazz pianist Marian McPartland will be giving one of her rare speaking engagements. She also announced the date of the annual Friends' Book and Author Luncheon: Friday, May 9. Finally, she reminded everyone to be sure to vote in the upcoming library budget and trustee election on Tuesday, April 8 from 7 a.m. to 9 p.m.