Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: TUESDAY, July 17, 1990 TAG: 9007170389
SECTION: NATIONAL/INTERNATIONAL PAGE: A/1 EDITION: EVENING
SOURCE: CHARLES V. ZEHREN/ NEWSDAY
DATELINE: LENGTH: Medium
But economists and investors outside the Capital Beltway weren't running for the exits Monday after the Bush administration announced that the projected federal deficit is two-thirds higher than forecast six months ago.
Indeed, Wall Street reacted to the news with a collective yawn as the Dow Jones industrial average broke through the 3,000 mark and closed slightly lower. Bonds closed nearly unchanged in sluggish trading.
"The announcement just confirms the trends that financial market participants already discerned," said Irwin Kellner, chief economist of Manufacturers Hanover Trust Co. "Tell me, what else is new?"
Economists said it is highly unlikely, especially in an election year, that Congress and the White House will agree to cut the federal budget by the more than $100 billion mandated by the Gramm-Rudman balanced budget law given the new deficit projection.
The federal government can safely cut only $50 billion to $60 billion from the budget without tipping the already shaky national economy into recession, they said.
"Something's gotta give, but $100 billion would be too draconian," said Neal Soss, chief economist of First Boston Corp., a New York investment bank.
Yet, Kellner said, the administration's new $168.8 billion figure still grossly underestimates the size of the budget gap because it is based on economic forecasts that are too rosy. Washington also has yet to produce a budget that hits the deficit reduction targets.
"No one on Wall Street seriously expects a balanced budget any time soon," Kellner said. "The financial markets are saying that the Gramm-Rudman law is a toothless tiger."
The administration blamed the increase on a number of factors, including a slowing economy and higher interest rates. But by raising its estimate of the fiscal 1991 deficit, the administration is simply bringing its projections closer into line with those of congressional and private economists.
"The White House is smelling the coffee today," said Joseph Minarik, executive director of Congress' Joint Economic Committee. "The economy has not changed as much as the administration has recognized the situation."
In fact, the reduction in the deficit projection is strictly a political and not an economic event, according to Eugene Sherman, chief economist at the Federal Home Loan Bank of New York. He interpreted the announcement as a move by the White House to put pressure on Congress to raise the Gramm-Rudman deficit targets and reach agreement on a package of spending reductions and tax increases.
by CNB