- The Washington Times - Saturday, August 18, 2001

White House economic adviser Larry Lindsey said yesterday that the U.S. economy was "skirting a recession" but will narrowly avoid one, with an economic recovery in 2002.
"The president intends to stay the course" with his $1.35 trillion tax cut plan, he said. "Tax cuts are the solution. They are not part of the problem. It's necessary to get the economy growing again, and that's what the tax cuts are for. This is Economics 101."
Yet some conservatives believe the administration needs to do more to stimulate the anemic economy by implementing a sweeping cut in the capital-gains tax. Senate Minority Leader Trent Lott has said he will attempt to add an amendment calling for a reduction in the capital-gains tax to a bill that would increase the minimum wage.
But Treasury Secretary Paul H. O'Neill said the federal budget cannot sustain a cut in the capital-gains tax.
"Unless somebody's got some magic way to free up some money that's otherwise being spent, then there's not room for more tax reductions at the moment," Mr. O'Neill said in an interview that will air today on CNN's "Evans, Novak, Hunt & Shields."
Mr. O'Neill noted that President Bush delivered on his promise to "give the American people more of their own money back to them" with a 10-year across-the-board cut in income taxes.
Mr. Lindsey said he expects the gross domestic product for the current third quarter to be higher than the 0.7 percent growth rate set in the second quarter, which he said will be the lowest point for the year.
"The second quarter is going to be the weakest. The third-quarter growth will be a little higher; so will the fourth quarter, when we will begin to get back to a more normal rate of growth," the White House's chief economist said in an interview.
"We're skirting a recession, but I think we'll avoid it," he said.
He cited three factors for his thinking: the president's tax cuts and the stimulative effect of nearly $40 billion in tax rebate checks that are still being mailed out, the Federal Reserve Board's continuing interest rate cuts and more moderate energy prices.
Mr. O'Neill also defended the administration's forecast of an economic growth rate of 3.2 percent next year.
Although many say the projection is far too high, Mr. O'Neill said, "I don't think we're terribly far off the range.
"If you look at the way the U.S. economy has rebounded from correctional periods in the past, in fact, a forecast of 3.2 percent is not out of order," he said. "Oftentimes, the rate of increase coming out of a correction is much faster than what we're forecasting in our expectations for the next calendar year. So I think we're in a reasonable range."
Mr. Lindsey also took issue with Democratic leaders who this week blamed the Bush tax cuts for the shrinking budget surplus, saying that Democrats were "playing politics" with the budget numbers when the declining economy was largely responsible for lower-than-expected tax revenues.
In the administration's first direct response to the growing attacks by Senate Democratic leader Tom Daschle and House Democratic leader Richard A. Gephardt, Mr. Lindsey said that "playing politics with the budget numbers and the economy is not doing anyone a service."
He denied charges that the administration was using "budget gimmicks" to mask the decline in the government's operating budget surplus through an accounting adjustment in Social Security payroll revenues in earlier years.
"It doesn't give us any extra money. There are no gimmicks here," he said.
Instead, Mr. Lindsey accused Democratic leaders of hypocritically charging that the size of the administration's tax cut was responsible for reducing this year's projected budget surplus when the Democrats' alternative tax cut that Congress rejected was roughly the same size as Mr. Bush's plan in the first five years, though much smaller over a 10-year period.
"First they said that you can't have a tax cut because it's too stimulative. Then they said our tax cut is as big as yours. Now they're saying your tax cut is causing this problem with the surplus. That's playing politics. They were saying exactly the opposite not too long ago," he said.
"If it's the tax cuts that's causing a lower surplus, wouldn't the problem be their tax cuts too?" he asked.
Mr. Lindsey also criticized what he suggested was a double standard being used by the two Democratic leaders on the surplus.
Mr. Daschle and Mr. Gephardt have focused their criticism on the government's operating budget surplus, which does not include the much larger Social Security and Medicare surpluses derived from payroll taxes.
When the White House Office of Management and Budget (OMB) releases its new budget surplus estimates for this fiscal year next Wednesday, the Social Security/ Medicare surplus was expected to total nearly $160 billion, the second-highest in U.S. history. The operating budget surplus is expected to be "in the single digits," Mr. Lindsey said.
But Mr. Lindsey asked why one surplus should be separated from the other to measure the fiscal health of the government, when all of its revenues fall under a unified budget.
He said the decline in the general operating budget surplus was actually the result of falling corporate profits that plunged in the first quarter to 1995 levels. "So corporate tax levels are substantially down, as well," he said.
"That began a year ago, and that is causing fewer corporate tax receipts. The problem is a slowing economy, and the economy began slowing in the middle of 2000," he said.
Mr. Lindsey said OMB's current 10-year, $5.8 trillion budget surplus projection is based on conservative forecasts that include two recessions and that he did not see anything in the future to significantly change those estimates.
"The budget surplus numbers are very robust. We expect them to come in at that number or even higher," he said.
Joyce Howard Price contributed to this article.

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