Fed Move Key to Clinton Reelection?
THE risk of a recession next year is pumping up the pressure on President Clinton and Capitol Hill Republicans to strike a budget deal.
The president and Congress, and certainly Wall Street, are expecting Federal Reserve chairman Alan Greenspan to spur the economy with a cut in interest rates next week or next month.
But will Mr. Greenspan and other Fed policymakers trim rates before they see a budget deal that includes major deficit reductions?
Mr. Clinton is pushed in two directions. Some analysts say he must not appear to be caving in to the GOP Congress by compromising too early or too much. Others say the Fed's position is politically critical; no interest-rate cut would raise the risk of recession.
Sales of major products such as autos are slumping. Manufacturing growth has paused. Economic indicators of future activity are flashing warning signs, even though economists say national output is growing at an annual rate of about 2.5 percent.
''All the risk in the economy today is on the recession side'' rather than the side of overheating and fueling inflation, says economist Bruce Bartlett, senior fellow of the National Center for Policy Analysis in Dallas. ''It's accepted knowledge that a strong economy is by far the most important factor'' for Clinton's reelection next November.
Mr. Bartlett's reasoning assumes that a drop in interest rates would have a fairly quick stimulative effect on the economy, say over the next 10 to 12 months.
''It's actually unclear whether a compromise budget deal'' and interest rate cuts would ''reinvigorate the economy that quickly,'' says George Borjas, an economist at University of California, San Diego. For that reason, he would rather see Republicans ''hold out for a budget package that gets entitlements back in line.''
Any short-run problems with recession are less important than long-run considerations, he says.
By contrast, economist Dean Baker at the Economic Policy Institute in Washington says: ''The budget debate has gotten silly and absurd because the difference in the effect on the economy over seven years between the projected numbers on the two sides is very small.''
The Congressional Budget Office changed its numbers Monday, estimating that deficits over the next seven years would be about $288 billion less than it predicted last spring. Analysts estimate that with the CBO's changes, the gap between the two sides has narrowed by $135 billion to $300 billion, or a bit less.
Large cuts in the deficit and solid tax cuts would mean ''faster economic growth, higher corporate profits, and less inflation,'' argues CBO economist Brian Wesbury. ''Between 1947 and 1967, the US economy grew at a rate of 4 percent, and government spending was about 18 percent of the gross domestic product.''
Since 1967, he says, government spending has averaged 22.5 percent of GDP, and ''growth slowed to about 2.5 percent during this period.'' The exception was from mid-1982 until 1989, he says, when growth shot up to 3.9 percent following tax cuts. Wages will rise more rapidly if the growth rate picks up, he adds.