Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post Newsgroups: americast.twt.news From: americast-post@AmeriCast.Com Organization: American Cybercasting Approved: americast-post@AmeriCast.com Subject: On Wall Street, deficit is priority Date: Thu, 5 Nov 92 17:01:12 EST Message-ID: \SE A \HD On Wall Street, deficit is priority \SH Cuts, tax boost may be needed \BY David R. Sands \CR THE WASHINGTON TIMES President Clinton's top economic priority after taking office in January may be to start making some enemies. The Arkansas governor's much-touted spending and jobs plan had better come with a credible long-term deficit-reduction program or the economy may be in for a rerun of the late-1970s record of high inflation and low growth - and America will be looking at its second straight one-term president, Wall Street traders and economists warned yesterday. The new president should combine any short-term plan to stimulate the economy with a multiyear plan to bring down the gaping federal budget deficit, Martin Feldstein, a Harvard economist and the president of the National Bureau of Economic Research, said yesterday. Any credible plan - one that nervous bond traders would accept - will have to include unpopular tax increases and entitlement cuts beyond those Mr. Clinton talked about in his campaign, he said. "It's very unlikely that Clinton would take that route in the first six months of his administration, but anything less will probably be rejected by the financial markets," Mr. Feldstein argued. The market won't be spooked by a Clinton prime-the-pump federal spending program, said Jack W. Gibbs, manager of institutional sales and U.S. equities in Europe for Merrill Lynch Capital Markets, if a real deficit-reduction program is in place. "I think the market will be encouraged if the hard decisions are taken first and the easy ones - the spending - come afterward," he said. Clinton surrogates worked hard in the closing weeks of the campaign to convince skeptical Wall Street traders that the Democratic program wouldn't mean uncontrolled government spending, renewed inflation and higher interest rates. Interest rates on long-term Treasury bonds moved up in September as the Clinton lead hardened in the polls, going from 7.25 percent for 30-year bonds to 7.7 percent in the campaign's final days. That directly reflects traders' concern that inflation was set to rise. Mr. Clinton addressed those fears directly in his first post-election speech yesterday, saying his changes won't come at the expense of "stability" or the market. "The changes I seek will strengthen America's market systems, not weaken them," he said. Jay Goldinger, chief investment strategist at Capital Insight Inc., a Los Angeles investment firm, predicts Mr. Clinton will go even further, using his political honeymoon to administer some bitter economic medicine while his popularity is at its highest. "Bill Clinton's landslide victory will have his constituents fretting and Bush supporters cheering him six months from today," Mr. Goldinger said. ". . . He understands investment markets are watchdogging him every day." Political calculations may also force the Democratic administration to cover its fiscal flanks and keep Wall Street pacified, said James R. Jones, chairman of the American Stock Exchange and former Republican member of the House Ways and Means Committee. "Clinton is a student of history, of what happened in the Carter, Reagan and Bush terms," Mr. Jones said. "He probably recognizes that if he doesn't face the deficit problem fairly early it's going to jeopardize his re-election chances in 1996." "In general, the stock market will tend to give Clinton the benefit of the doubt while the bond markets will be a little more skeptical," said Eric Miller, chief investment officer at Donaldson, Lufkin & Jenrette Securities Corp. The first and most important signal for investors will be the composition of Mr. Clinton's economic team. The president-elect has consulted a wide range of advisers on economic issues, and investors are watching closely to see who gets the key policy posts. "The appointments Clinton makes between now and Christmas will give investors a clear signal as to his intentions in such policy areas as trade, budget, taxes and health care," said Tom Gallagher, chief political analyst at Shearson Lehman Brothers. One rumor has former Federal Reserve Board chairman and legendary inflation fighter Paul Volcker taking over at the Treasury Department, which would be a strong positive signal to the bond market. Analysts also noted that Mr. Clinton had unexpectedly kind words to say in the presidential debates for current Fed Chairman Alan Greenspan. One important advantage for the new administration is that most economists believe there is room in early 1993 for a quick-hit government spending and jobs program of about $25 billion to $30 billion without touching off inflationary fears. Shearson's chief economist, Robert Barbera, notes that wage and inflationary pressures right now are extremely low, banks and households have cleaned up their balance sheets after the 1980s binges, and there is once again pent-up demand in the economy. Even Mr. Feldstein, while cautioning about the dangers the Clinton team faces, said he believes cyclical forces and the underlying strength of the American economy make it likely President Clinton will be able to boast in four years that the country is better off than it is today. Beyond fiscal and tax policy, the Clinton administration faces a number of key economic and business question marks early in its term. They include: * Trade. Both the free trade accord with Mexico and Canada and the global talks on reducing trade barriers are at delicate points. Whether Mr. Clinton, under pressure from union supporters, will seek significant changes in the North American Free Trade Agreement will be a key early test. * Regulation. Business groups worry that an activist Democratic administration and Vice President-elect Al Gore's strong pro-environmental stands may mean more government oversight of their operations. Few see significant regulatory relief from the Clinton administration, and business groups are gearing up for damage control. "The best thing I could see them doing for regulation is to stay away from it," said David Campbell, president of Annandale's Ameribanc Savings Bank. * Industrial policy. Already a number of industries, including biotech, infrastructure companies and aerospace manufacturers, see major new government support coming their way. Keeping some of his expensive promises while avoiding middle-class tax increases may prove a difficult balancing act for Mr. Clinton. ****BOX ADVICE ON MONEY MATTERS Profiles of Bill Clinton's team of economic advisers Roger C. Altman, 46, vice chairman of the Blackstone Group, a New York investment bank. Former assistant Treasury secretary for domestic policy in the Carter administration. Opposes deep cut in spending out of fear it could shrink the economy. Robert B. Reich, 46, a political economist at Harvard University and a policy adviser to Democratic presidential contenders for a decade. Stresses need to improve living standards with investments in people, roads and communications. Robert E. Rubin, 54, chairman of New York investment bank Goldman Sachs & Co. Democratic fund-raiser and Clinton contributor who wants to combine public investment with deficit reduction. Robert J. Shapiro, 43, chief economic theorist for the Progressive Policy Institute, a think tank associated with the Democratic Leadership Council. Former aide to 1988 Democratic nominee Michael Dukakis and to Sen. Daniel P. Moynihan of New York. Said to be the most market oriented of Mr. Clinton's advisers, concerned about the deficit. Ira C. Magaziner, 44, president of SJS Inc., a Providence, R.I., think tank and advocacy group. Rhodes scholar with Mr. Clinton. Advocates major defense conversion, education and worker training programs. Derek N. Shearer, 45, public policy professor at Occidental College in Los Angeles. Served briefly as aide to former California Gov. Jerry Brown. Favors more spending to stimulate economy and less concerned about deficit reduction. Felix Rohatyn, 64, investment banker. Partner with Lazard Freres & Co. in New York. Helped steer New York City away from bankruptcy in the 1970s. Advocates public use of pension fund capital to aid U.S. cities. Source: Associated Press This article is copyright 1992 The Washington Times. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM