12 January 2001, 10:09 Baily says US fiscal discipline fueled new economy
--Baily says economy fundamentals strong, doesn't see recession
--Baily says economic slowdown is likely a "temporary phenomenon"
--Baily urges any US tax cuts be moderate, aimed at low, middle incomes
By Simon Kennedy, BridgeNews
Washington--Jan. 12--The Clinton presidency ends having spawned a "new
economy" of strong productivity and economic growth alongside modest
inflation, but it has not sown the seeds of a recession that demands large
tax cuts, according to the final report of the President's Council of
Economic Advisers and its chairman, Martin Baily.
* * *
"We are optimistic about this economy, we think its fundamentals are
strong and we don't envisage a recession," Baily said Thursday in a
briefing before the report's Friday release. "Productivity is growing,
inflation is moderate and there is a good fiscal situation so there are
none of the things which have gotten us into trouble in the past."
He also pointed to high consumer confidence, lean inventories that
should prove straightforward to manage, strong productivity growth and a
labor market in "pretty good shape" as further reasons to believe that the
economy will avoid recession.
Although he agreed that manufacturing, including the auto industry,
had weakened lately, he expressed faith that the latest slowdown in the
general economy would prove to be a "temporary phenomenon" and the economy
would return to its non-inflationary growth rate of around 3.8% later this
year.
The 2001 Economic Report of the President, to be signed and submitted
to Congress by President Clinton later today, analyzes the "new economy"
and credits fiscal discipline as having played a "critical role" in its
formation.
"In the past eight years the structural federal budget balance has
moved steadily from deficit to surplus," Baily said. "The policy decision
to exercise fiscal discipline was critical to setting in motion a virtuous
cycle that has helped sustain this expansion."
While handing some of the credit for the prosperity to technological
innovation and organizational changes made by American business, Baily
maintained public policy had been a vital driving force.
Most importantly, he argued that the switch from a record $290 billion
budget deficit in 1992 to an unprecedented $237 billion surplus in the
last fiscal year had "helped keep interest rates low and stimulated
dramatic growth in investment, which in turn boosted productivity, thereby
contributing to faster growth."
It was such gains in economic performance--alongside the existence of
moderate inflation, low unemployment and rising incomes--which had
resulted from the "combination of mutually reinforcing advances in
technologies, business practices and economic policies." It was these
advances and their causes which the CEA combined to define a "new
economy."
Clinton's promotion of free trade, deregulation and better education
had also supported the economy, Baily contended.
Since Clinton's 1993 arrival in the White House, this economic
environment has helped the economy to expand at an annual rate 46% greater
than in the 20 years before, created 22 million fresh jobs and kept
inflation moderate, the 402-page report said.
"In the second half of the 1990s, the U.S. economy grew faster than
that of any other major industrial country," it cheered, also observing
there had been annual basis it has accelerated by 1.6 percentage points since 1995, with
the majority of this increase derived from technological improvements in
the rest of the economy.
But the report warned that the arrival of a "new economy" did not mean
the death of a business cycle of fluctuating gross domestic product
growth.
"The fundamental rules of economics have not been repealed in the new
economy," it said. "Policy remains crucial in ensuring non-inflationary
growth, preserving fiscal discipline, nurturing a vibrant private sector."
Accordingly, Baily urged the continuance of the fiscal austerity that
has been a hallmark of Clinton economic policy.
Asked whether such a strategy was at risk under the incoming Bush
administration--which has lobbied for a $1.6 trillion tax cut over the
next decade rather than the $500 billion reduction sought in his latest
budget submission by Clinton--Baily said any tax cuts should satisfy two
rules.
"A tax cut should be moderate in size so as not to cut the long-run
fiscal discipline that has been important to the economy, and should be
targeted at low- and middle-income earners, not just one accruing to"
those on high incomes, he said. If those requirements were met then there
was "nothing wrong with getting a stimulus of a tax cut." In pointed
remarks, he said it was important for the new administration "to keep a
steady hand on fiscal policy and to avoid disrupting long-run growth for
short-term expediency." Fiscal policy should also be aimed at ensuring
that the budget surpluses keep mounting and that the nation's debt
continued to be paid down, he added.
Despite his optimism over the economy's future, Baily admitted
challenges remained, noting the record current account deficit, the need
to shore up Social Security and Medicare before the Baby Boom generation
retires and the negative personal savings rate as other factors why budget
surpluses should be preserved.
Regarding the current account deficit. he repeated his long-held
belief that it should narrow as exports rise.
Looking forward, the CEA forecast gross domestic product to rise 3.2%
on a fourth-quarter to fourth-quarter basis this year and next. However,
Baily admitted that while these remained the projections that would be
plugged into the Clinton administration's budget calculations, they were
drawn up in November before the latest batch of economic data was
available. More recent statistics have suggested the economy is fading far
faster than most thought even as recently as two months ago.
"Given what we know now we may have made different forecasts," Baily
said of the near-term predictions. He pointed to the latest Blue Chip
group of independent forecasters' consensus call for GDP growth of 2.7%
this year as a reliable estimate.
The consumer price index was estimated by the CEA to rise 2.5% and
2.6% in 2001 and 2002 respectively. Baily said it was unlikely these would
have been different even with the benefit of hindsight. End
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