Bush keeps rosy economic outlook

Posted: Sunday, March 25, 2001

WASHINGTON -- Even in the face of a stock market rout and an economic slowdown, President Bush is sticking to his plan. He is not trimming his spending proposals nor his $1.6 trillion tax cut to reflect a potentially lower surplus from a downturn.

How can such gravity-defying optimism be possible?

''The surplus continues to grow larger -- even with the softness in the economy,'' White House spokesman Ari Fleischer says. ''I know it sounds incongruous.''

While Democrats are challenging the president's math, many economists suggest the administration's rosy calculus can be justified. But many also urge caution in relying on such long-range projections.

The administration is basing its budget goals on a conviction that current weaknesses are temporary, and that a combination of Fed interest-rate cuts and the president's tax cut can put the nation back on track to the $5.6 trillion, 10-year surplus that has been widely predicted.

''I'm very confident about our economy,'' Bush told reporters last week. ''I know it can beat expectations.''

Critics are dubious, particularly in light of the carnage on Wall Street, reduced consumer confidence, energy shortages, bleak corporate earnings and mounting layoffs.

House Minority Leader Richard Gephardt, D-Mo., complained that the Bush's tax cut plan was drafted last year when times were booming, technology stocks riding high, the U.S. economy the locomotive of global growth.

''Things changed,'' Gephardt said.

Bush's budget, including its centerpiece tax cut, depends on sustained economic growth for the next 10 years -- pegged at 3.3 percent next year, then leveling off to about 3.1 percent.

Each 0.1 percentage point drop in growth below projections can slice about $250 billion from the projected surplus over 10 years.

And the American economy has slowed to a virtual standstill after growing at an anemic annual rate of just 1.1 percent in the final three months of 2000.

Furthermore, a declining stock market can eat away at capital gains tax revenues to the Treasury.

In January, both the administration and the nonpartisan Congressional Budget Office estimated a $281 billion surplus in the current fiscal year. But some Wall Street firms and private forecasters have since lowered their own estimates.

Merrill Lynch, for instance, last week cut its current year surplus estimate to $250 billion.

The administration brushes aside short-term weaknesses in the economy and the stock market, preferring instead to look at the long term. Many economists say historical trends can support such an approach.

Even though Merrill Lynch cut its surplus estimate for 2001, the administration's $5.6 trillion ten-year surplus projection remains ''quite reasonable,'' Merrill Lynch economist Stan Shipley said.

He noted that the average recession lasts nine months.

While interest rate cuts by the Federal Reserve -- 1.5 percentage points this year -- failed to impress Wall Street, they should contribute to a snap back in overall economic growth later this year, Shipley and other analysts say.

It would take a prolonged and severe recession to gobble up the surplus entirely, said former Congressional Budget Office director Robert Reischauer. ''The weakness we're experiencing now should have very little impact on the budget surplus projected for a 10-year period,'' he said.

Still, Reischauer said he is leery of trying to forecast so far in the future.

The administration and Congress ''shouldn't act on these projections as if this was money in the bank,'' Reischauer said.

''It's as much pie in the sky as it is money in the bank.''

Even if the current downturn will not affect the 10-year surplus outlook, it could create havoc for Bush's program in the near-term, many analysts say.

For instance, a lower 2001 surplus may make it harder for Congress to speed up the tax cut while paying for Bush's spending priorities -- including a national missile defense, an 11 percent rise in education spending and a prescription drug plan for senior citizens.

Meanwhile, the budget math has become part of the political debate as Democrats gleefully note that Bush's recent optimism on the economy seem somewhat at odds with his warning last month that, ''A warning light is flashing on the dashboard of our economy.''

''The administration sounds like the Bad News Bears,'' said Senate Minority Leader Tom Daschle of South Dakota.

Tom Raum has covered Washington for The Associated Press since 1973, including five presidencies.

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