New US Budget Has Positive Spin
But critics say Bush administration's optimistic outlook is not justified by fiscal realities. BUDGET DEFICITS
THE Bush administration's unbridled optimism about the nation's economic future continues despite recession, the untold cost of paying for the savings-and-loan crisis, and prospects for a highly costly war in the Persian Gulf. The White House sent Congress a $1.45 trillion budget on Feb. 4 based on an upbeat outlook: a short recession and a short war. Released by Office of Management and Budget (OMB) director Richard Darman, the 1992 fiscal plan calls for modest spending increases (including $15 billion for Operation Desert Storm, to last until March 31) and almost $47 billion in program cuts over the next five years. The 1992 fiscal year begins Oct. 1 (see below).
Economists question the wisdom of the administration's outlook, stressing that the budget is based on false optimism and that the numbers fail to reflect undetermined federal outlays, including increased involvement in propping up the United States banking industry and added defense costs. Another ominous variable: the duration and depth of the recession.
Mr. Darman defended as realistic the administration's projection of a $318 billion deficit for fiscal 1991. He said deposit insurance coverage for the country's failing banks accounts for $111 billion of 1991's deficit, a number private economists say may be surpassed in the 1992 deficit.
Even if war costs spiral beyond the $15 billion in OMB's plan, Darman says, foreign contributions to Desert Storm should negate the need for further US expenditure.
But Sung Won Sohn, chief economist of Minneapolis-based Norwest Corporation, says: ``This is a gross underestimate of the budget situation.'' He says the administration's ``highly optimistic view hurts its credibility.''
Treasury Secretary Nicholas Brady noted earlier this week that the federal government will borrow ``half a trillion dollars less over the next five years'' and that the 2.6 percent increase in spending proposed by the White House budget plan does not even keep up with inflation.
Bush administration officials, who just last month conceded the economy has been in a recession since late last summer, say it will run short and shallow, ending by the second quarter of this year.
Running down the recession's roots, Darman points to the Federal Reserve's ``tight monetary policy [which] limited the potential for real growth; a regulatory crunch with the banks tightening up too much, ... and Iraq's invasion of Kuwait.''
The Gulf crisis, he says, was by far the biggest contributor to recession - bringing high oil prices, high interest rates, fears of inflation, and plummeting consumer confidence.
As Bush issued his budget message Feb. 4, ensuring a ``return to growth soon,'' the US Department of Labor issued some distressing news. Overall business productivity in the US, including agriculture, declined 0.6 percent for 1990, compared with a drop of 0.5 percent in 1989. Last year's falloff in productivity was the largest since 1982, a year of deep recession.
The White House offers no spending initiatives to spur economic growth, because there is no money to do so. ``There is no room for new spending, and no idea about how to cut back on existing programs,'' says Barry Bosworth, senior fellow at the Brookings Institution, ``not from the administration or from the Democrats. We're stagnant.''
The White House budget plan renews the call for a tax cut in capital gains, profits earned from the sale of investments. Proponents say this would provide additional capital for increased investments in the US economy.
Norwest Corporation's Mr. Sohn says he is looking for a more realistic spur to the economy: ``If the administration would come clean with a worst-case scenario, rather than a rosy picture, long-term interest rates would be significantly lower and the stock market would respond more favorably.''
The current budget projections will have ``negative consequences for financial markets,'' he says. ``One of the things the market doesn't like is uncertainty. Year after year, the administration comes up with a bright economic picture that fails to materialize, and this breeds uncertainty, Sohn adds.''
Joe Cobb, Republican staff director of the Joint Economic Committee, says unemployment is a ``lagging indicator, slow to improve even after the economy begins to rebound. If you look at the economy on a regional basis, recession is not that serious, especially in the Midwest, the Southwest, and the South.'' It is most pronounced in the Northeast and the Mid-Atlantic, a correction Mr. Cobb says was inevitable for areas that did extremely well in the 1980s.
Administration economists are unfairly accused of overly optimistic assessments of the country's economic future, Cobb says. Unless the administration possesses strong data confirming economic downturn, ``it is constrained not to shoot from the hip.''
Negative forecasts become self-fulfilling prophesies, he says, as pessimistic consumers and businesses spend less and shrink the economy.
Last week, Federal Reserve Board chairman Alan Greenspan was uncharacteristically forthright about the nation's economic prospects. Drawing the link between a long war and consumer uncertainty, he cautioned last month that if the war goes beyond April, the economy will slip into a deep recession.
Looming large on the economic horizon are record-breaking deficits. The White House projects the $318 billion deficit for fiscal year 1991 will dip to $281 billion in 1992.
Mr. Bosworth expects the 1991 deficit to go as high as $350 billion, counting war and S&L bailout costs. He projects a $325 billion deficit for 1992.
Sohn says 1992's deficit will be even higher after up to $100 billion in S&L cleanup costs and $30 billion in Desert Storm costs are taken into account.
``We're not making any progress at all on deficit reduction,'' Bosworth says. ``The economy has to grow at least 3 percent a year to meet spending. That's unlikely.