February 8, 1998

Proposed Federal Budget Needs A One-Arm Economist

President Clinton’s new federal budget recalls President Harry Truman’s search for a one-armed economic advisor -- a person who wouldn’t continually say, “You could do this; but, on the other hand, you could do that.”

The record $1.7 trillion budget sent to Congress on Monday is a plum pudding waiting for every one to stick in their thumbs. Despite $50 billion in new spending, revenues are expected to produce a $9.5 billion surplus with which to shore up Social Security.

Sen. Pete Domenici, budget committee chairman, calls it a “magnificent contradiction.” It is no coincidence that Clinton expects to reap a windfall of $9.8 billion from tobacco companies in cigarette taxes of $1.50 per pack and a healthy slice of a possible liability settlement.

When Democrats controlled Congress, they habitually declared President Ronald Reagan’s proposed budgets “DOA” -- dead on arrival. Republicans now in charge declare Clinton’s proposal DOC -- dead on conception.

Congress is fighting over who is responsible for what is said to be a booming economy.

Democrats assert today’s good times stem from Clinton’s 1993 budget, which levied the largest tax increase in history but freed up private capital for billions of dollars in new investments. This, in turn, produced more tax revenue.

Clinton’s economic advisors call this a “virtuous circle of expanded growth.”

Republicans say President Reagan’s hefty tax cut of 1981 launched the longest economic boon in our nation’s history. In addition, their 1994 “Contract With America” forced Clinton to fiscal sanity.

Robert Livingston, chairman of the House Appropriations Committee, declares, “Last year we had the first tax cut in 16 years and, effectively, we’ve already balanced the budget.”

Investors scoff at the politicians. They credit a one-arm economist named Alan Greenspan, chairman of the Federal Reserve System. Grudging recognition also is accorded President George Bush who broke his vow of “no new taxes.”

Two debates rage among professional economists:

• Are things as rosy as they seem?
• If so, will it last?

“Yes and yes,” say a new breed of analysts promoting a one-world “New Economy.” They base their beliefs on increased globalization imposing strong competition, new technology producing more goods with less workers, and deregulation allowing industries to operate more efficiently.

Economic traditionalists like Greenspan place all bets on hard money and low interest rates. This, with some good luck, is thought to win out in the long run.

Supply-siders say today’s economic indicators violate “natural” levels and foretell big troubles. Clinton brags about numbers that really are storm warnings.

For example, last year’s growth rate of 3.8 percent sounds good when compared with the average of 2.9 percent since the end of the last recession in March 1991. Conservative economists say annual growth -- and inflation -- of 3 percent is about right the healthiest. It is considered about right for orderly investment and production.

Today’s unemployment rate of 4.7 percent contrasts the 1991 rate of 7.7 percent. Many economists say 6 percent indicates a thriving labor market. With an abundance of jobs available, workers move to better paying positions -- taking advantage of unemployment compensation in the short transition. Lower unemployment means a stagnant labor market.

The Federal Open Market Committee voted last week to hold the benchmark funds rate -- interest on loans between banks -- at 5.5 percent. This encourages favorable mortgages but drains money from bonds, which are the principal source of personal retirement income. Six percent is considered a natural balance between all capital needs.

A large part of increases in government revenue comes from capital gains taxes. Holders of bonds and bank certificate liquidate these “safe” (but low-yield) securities to chase speculative stocks. The stock averages are at giddy heights but eventually will crash to natural levels related to dividends.

Greenspan told Congress last week that the U.S. economy is “exceptionally healthy.” However, he warned that the country has experienced only the “peripheral winds of the Asian crisis.”

Congress, administration, Federal Reserve, and lending institutions tinker with tenths of percentages which translate to billions of dollars swishing around. Foreign counterparts do the same. The world’s inter-dependent economies haven’t yet found the natural balances for free-market transactions.

U.S. presidents propose, but Congress disposes. With no real responsibility for outcome, Clinton can make popularity points. Fate of the nation’s economy rests with Congress, which must make the hard decisions.

It is possible that the president and Congress will gridlock. In this case, any surplus would apply automatically to the humongous national debt of $5.5 trillion.

Robert Reischauser, former labor secretary and director of the Congressional Budget Office when the Democrats were in control, states: “When you have small land growing surpluses, gridlock is a blessing.”

Greenspan told Congress last week: “I have always emphasized that we should be aiming for budgetary surpluses and using the proceeds to retire outstanding federal debt,” stated Greenspan in an Associated Press report Friday.

There are good one-arm economists out there. All we need is the smarts to pay attention.

PARTING SHOTS

Hell hath no fury like a woman suborned.

* * *

Hillary Clinton complains a “vast, right wing conspiracy” is the cause of her husband’s troubles. She should be more concerned about a White House west wing.

By Lindsey Williams, columnist for Sun Coast Media Group newspapers