Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, May 14, 1990 TAG: 9005140086
SECTION: NATIONAL/INTERNATIONAL PAGE: A1 EDITION: METRO
SOURCE: Associated Press
DATELINE: WASHINGTON LENGTH: Medium
The fear is that cutting the budget deficit by the size being discussed - a combination of spending restraints and new taxes in the range of $60 billion to $100 billion - would take a lot of steam out of the economy.
With economic growth only expected to average an anemic 2 percent this year, such a wallop could easily push the country into a recession, putting an end to the longest peacetime expansion on record.
"This could be a classic case of doing the right thing at the wrong time," said David Jones, an economist at Aubrey G. Lanston & Co.
Jones predicted that the adverse impact from a budget agreement would hit in late 1991 or early 1992, when the loss of government spending in both domestic and military programs and lower disposable income from higher taxes would be enough to trigger a slump.
"It would be the worst possible environment for the president to run for re-election," Jones said last week. "It could make George Bush a one-term president."
However, other economists argued that Bush is right to take the risk of reaching a far-reaching agreement that finally would resolve the deficit problem that has plagued the country for nearly a decade.
These economists believe a successful budget-reduction package would result in a significant drop in interest rates, reflecting a reduced government drain on capital markets.
"It would be unfortunate if a weak economy deterred the president and Congress from making a major fix on the budget," said Allen Sinai, chief economist of the Boston Co. "It really is the right time provided that the Federal Reserve [Board] responds to offset the budgetary restraint."
But even the optimists concede that such a scenario will be difficult to pull off, given that actions such as tax increases and moves by the Fed to lower interest rates often have long and unpredictable lag times.
"The danger is that fiscal policy [taxes and spending] and monetary policy [interest rates] won't be coordinated," said David Wyss, senior economist at DRI-McGraw Hill. "The Fed should really start loosening now to counteract spending cuts that would go into effect in October and a tax increase that would take effect in January."
Top Fed policy-makers will meet on Tuesday to map monetary strategy, but few analysts are looking for any immediate credit easing, given current Fed concerns that inflation remains a problem.
The Bush administration has been unsuccessfully pressuring the Fed to ease credit policies.
White House Budget Director Richard Darman now says the deficit absent any corrections could soar as much as $100 billion higher than the $64 billion target, triggering massive spending cuts in both military and defense programs under the Gramm-Rudman law.
Economists agree that arbitrary spending cuts of that magnitude would be harmful and it would be better to couple less severe spending reductions with a package of tax increases.
by CNB