ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Saturday, August 10, 1996 TAG: 9608120043
SECTION: NATL/INTL PAGE: A-1 EDITION: METRO
DATELINE: SAN DIEGO
SOURCE: MIKE McKEE BLOOMBERG BUSINESS NEWS
NOTE: Above
DOLE'S ADVISERS want to make one thing clear: his economic plan is not Reaganomics.
Yes, Bob Dole's economic plan may look like Ronald Reagan's, and Dole's aiming for it to have the same political effect of helping him win the White House. Dole's economic advisers, though, say critics need to understand one thing: It's not Reaganomics.
Unlike Ronald Reagan, who floated an economic theory and then tried to make it work, Dole knows his numbers add up, according to John Taylor, the Stanford University economist who coordinated development of the proposal.
Dole's orders to his economic team were to make the plan credible, Taylor said. Cutting taxes while slowing the growth of federal spending would put a significant amount of capital to productive use rather than diverting it to paying the bills for earlier spending, Taylor said.
``This is not voodoo economics. This is Econ 1,'' he said. ``This is what we teach our students. This is how the economy works.''
Others dismiss the plan as political maneuvering. ``This is a desperate move by a man who's 20 points behind in the polls,'' said Lyle Gramley, a former Federal Reserve governor, now a consulting economist at the Mortgage Bankers' Association of America. He said he has ``serious doubts'' lawmakers would cut spending enough to offset Dole's tax cuts.
Yet where Dole's critics go wrong, Taylor said, is in considering the plan's individual elements - especially the tax cuts - in isolation.
Dole's proposal to cut income taxes by 15 percent and halve the capital gains tax rate to 14 percent are a significant part of the package, ``but it's not the whole part,'' Taylor said.
First and foremost, the Dole team points to the candidate's promise to balance the federal budget in six years. That in itself would contribute to higher growth by bringing down interest rates. Politically, that's been a problem. Reagan never submitted a balanced budget, and even the new Republican congressional majority couldn't get one signed into law.
Still, the presence of a Republican majority would change everything for a Dole presidency, said Martin Anderson, an economic adviser to Reagan. ``When Ronald Reagan tried to do this, he had a Democratically controlled Congress. This fall, we're going to have a totally new environment,'' Anderson said.
Given lawmakers' recent history, that's still something of a leap of faith. Many of the easy whacks at waste, fraud and abuse have already been taken, and Dole himself said he won't seek any cuts in Medicare or Social Security beyond what Republicans have already proposed.
On top of that, even if the same party controls Congress and the White House, individual lawmakers balk at reducing programs that benefit their own districts. And unless Republicans hold at least 60 seats in the Senate, which isn't considered likely, Democrats in the minority could block bills that call for big cuts in social programs.
Even so, many outside observers say Dole's longtime opposition to deficit spending gives his balanced budget promise some credibility. ``Dole's record shows a commitment'' to cutting spending, said Clint Stretch, tax principal at Deloitte and Touche LLP in Washington. After extensive computer modeling, Dole knows how much he'll have to cut, Taylor said. The campaign's estimate of revenue lost to the tax cuts, $548 billion over six years, is ``solid,'' Taylor said. ``These numbers are really right there. There'll be no surprises.''
Dole has yet to say where he'd pare federal spending that totalled $1.5 trillion in fiscal 1995. His economic advisers, though, say there's plenty of room to find cuts, and House Speaker Newt Gingrich said he'll try to ensure there's no tax cutting without equal levels of budget-cutting.
``My goal would be to bring them up in one bill, and to have a major budget bill sometime next summer which would have the tax cuts and the changes necessary and do it in one vote,'' Gingrich said.
Put the two together, Anderson said, and you're even, economically. Then the tax cuts begin to have an effect.
And what many critics on Wall Street and in Washington either ignore or don't understand, he said, is that if spending is cut, supply-side economics does work. He cites a 1985 study by economist Lawrence Lindsey, now a Federal Reserve governor, showing that overall, the stimulative effects of the Reagan tax cuts meant the Treasury earned back half of the revenue lost. With more money available to spend, business picked up and so did tax revenues.
The effects were even more dramatic among the wealthy: those earning over $200,000 a year actually paid more in taxes than they had previously. That meant ``revenues were 50 percent higher at the end of the 1980s than at the beginning,'' according to economist Brian Wesbury from Griffin, Kubik, Stephens and Thompson in Chicago.
``I guarantee you if the Dole plan takes effect, revenues will be higher,'' said Wesbury, who until May was the chief economist for Congress' Joint Economic Committee.
Other economists agree. Tom Carpenter, chief economist at ASB Capital Management, which manages $6 billion in bonds, says after cutting the capital gains tax rate in half ``we may find that by next year there's no budget deficit,'' because people will no longer be sheltering investments from high taxes.
Dole's conservative in his assumptions, Taylor said. Rather than half, Dole is projecting a ``feedback'' of just 27 percent. ``I think it will be higher,'' said Taylor, but ``nothing like tax cuts pay for themselves is assumed in this program.''
Eventually, he said, growth should rise to 3.5 percent ``or higher,'' although the plan's revenue assumptions are not based on that growth rate. ``It's a goal,'' Taylor said. But even if you raise growth by 0.1 percent a year, he said, the cumulative effect on productivity and wages adds up. Productivity growth, he said, will keep the Federal Reserve on the sidelines, and interest rates low.
``The Fed is always looking for possible increases in productivity, what they call potential GDP growth,'' he said.
Private investors, meanwhile, secure in their investments, will push interest rates down, he said. ``What is valuable in financial markets is some degree of certainty [knowing] the intention on the part of policy-makers,'' Taylor said.
The bottom line, he said, is critics of the Dole plan are simply wrong about the economics. ``The assumptions that are used are standard, basic conventional economics,'' Taylor said. ``There's nothing hopeful or optimistic'' about them.
LENGTH: Long : 117 lines ILLUSTRATION: GRAPHIC: Chart by AP: Bob Dole tax plan.by CNB