Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: FRIDAY, January 31, 1992 TAG: 9201310027
SECTION: BUSINESS PAGE: D-1 EDITION: METRO
SOURCE: By JERRY KNIGHT and KIRSTIN DOWNEY
DATELINE: WASHINGTON LENGTH: Long
ECONOMISTS SKEPTICAL OF BUSH PLAN
President Bush has promised that the initiatives he detailed in his budget last week will "lift this nation out of hard times inch by inch," but economists reacted, saying Bush address draws mixed reviews. D3 that with the economy advancing just one inch at a time, there will be no quick return to prosperity.The White House plan is to steadily dribble sand on the scales until the economy returns to balance rather than to toss out weighty new programs that might risk tilting the system.
That approach satisfies many economists who believe the nation is gradually growing out of the recession and who fear that new efforts to give the system a bigger jolt might reignite inflation.
The president has proposed "a nice mix of sound policies," said economist Jerry Jasinowski, president of the National Association of Manufacturers. But the limited scope of the programs makes it clear that the administration's main strategy for economic revival is a continued reliance on lower interest rates engineered by the Federal Reserve, he added.
"He has avoided the problem of going forward with extreme programs that would raise long-term interest rates," Jasinowski said. "Extreme" in this sense would be a much bigger package of tax cuts that could give a big boost to consumer spending, but also send prices sharply upward.
But the benefits of each one of the dozens of tax, spending and economic policy changes proposed by the White House are so difficult to measure that even those who support the president's approach worry that they may not add up to enough to achieve either the political or economic goals that are desired.
"If it doesn't work economically, it's not going to work politically," warned Fabian Linden, chief economist for the Conference Board, a business organization that regularly monitors consumer confidence. The board's latest survey, released Tuesday, the same day of the president's speech, showed consumer confidence at its lowest level in a decade. This pessimism has been a heavy drag on the economy, offsetting thus far the lower interest rates offered by the Fed.
Linden, generally supportive of the administration plan, said, "The instincts are perfectly fine: to get more bucks into the hands of the guy who is going to run down to his local retailer and buy something." But the impact of many of the president's proposals will be so minimal "that you'll need a magnifying glass to find it," he said.
Linden noted that even the administration's biggest economic incentive for consumers - a proposed $5,000 tax credit for first-time home buyers - "as a contribution to buying a house is a less than imposing sum."
The one big fix in the administration package is aimed at the housing industry, which last year saw construction of new homes and apartments fall to the lowest level since 1946. Kent Colton, executive vice president of the National Association of Home Builders, predicted the package will result in 250,000 additional housing starts, 415,000 more jobs and $20 billion in additional economic benefits when buyers go shopping for furniture, paint, lawn mowers and everything else a new house needs.
The home builders presented Bush with a wish list of incentives and got virtually every one of them - the first-time buyers tax credit, penalty-free withdrawals from individual retirement accounts for first-time home buyers, restoration of special investment loss deductions for real estate industry professionals, tax deductions for losses on sales of homes and an extension of low-income housing credits.
Those incentives will encourage potential home buyers to buy now rather than wait, said Steve Montgomery, national director of real estate tax services for accounting firm Ernst & Young. "It will stimulate an earlier purchase decision than would otherwise have occurred," he said.
The administration plan was also welcomed by another hard-hit industry: the Detroit automakers. "People have been scared. They've put off buying high-ticket items like cars and homes that mean jobs," said Chrysler Chairman Lee Iacocca. "The president's proposal may be just the shot in the arm this economy needs."
For most families, however, the shot won't be anywhere close to big enough to make the payments on a new car. A trip to McDonald's is what most families can expect from the cut in federal income tax withholding ordered by Treasury Secretary Nicholas F. Brady.
A typical family of four with one wage-earner bringing in $700 a week will find an extra $6.60 a week in the paycheck as a result of the withholding change, and a single person making $25,000 a year would get an extra $15 a month, administration officials calculated.
Added together nationwide, however, these small amounts total $25 billion a year in additional cash and most of it will flow directly into the economy.
"If people get an extra $5 in their pocket, they'll spend it," said former Internal Revenue Service Director Sheldon Cohen, now a Washington tax lawyer.
That extra spending money is not the result of a tax cut, but simply of reducing withholding rates to put into people's paychecks the refund they ordinarily would receive.
Lots of people would rather not have that happen, Cohen warned. "Most people still want to be overwithheld," even if it means a little less money to spend.
"If they succeed [in stimulating the economy by reducing withholding] they will have lots of unhappy Americans on their hands," he predicted, because the reduction in withholding inevitably will mean some people will not have enough money taken out of their checks to cover the taxes due.
Some experts are skeptical that some of the proposed tax law changes meant to stimulate the economy will work at all or that they will work as well as predicted.
"It's quite possible they will have some effect. The real question is what's the magnitude," said Randall Weiss, director of tax economics for Deloitte & Touche, another big accounting firm. "Compared to lower interest rates, these things are relatively small."
Because of the inch-by-inch approach the White House is pursuing, the individual impact of any one of the proposed tax law changes will be very minor, said Eugene Steurele, a former Treasury Department tax expert now at the Urban Institute in Washington.
Many of the changes are a retreat from the tax reforms of 1986, which lowered overall income tax rates by doing away with hundreds of specific tax advantages for certain investments. But the tax write-offs are so small they barely matter, Steurele said. "Even the investment credit - which I happen to believe is a bad idea - is a pretty trivial credit," he said. "It's a movement backward, but without a lot of meat there."