Economy to worsen, study warns Case strengthened for strong action by Clinton

November 12, 1992|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau

WASHINGTON -- In a strikingly pessimistic forecast, the U.S. Chamber of Commerce yesterday warned that the economy is headed back into recession within 18 months unless the Clinton administration adopts "significant pro-growth" policies based on tax cuts and spending restraints.

The somber forecast was at odds with the assessment of most economists, who see slow but sustained recovery through 1993. But it reinforced President-elect Bill Clinton's assertion this week that there remain "a lot of very troubling signs in the economy."

It will also strengthen the case Mr. Clinton is expected to make at his economic summit in Little Rock next month that the economy is in even worse shape than generally realized and that it calls for a dramatic response.

"The economy is clearly different from what the outgoing administration has been saying -- namely 'Just wait and things will get better,' " said William K. MacReynolds, director of the chamber's economic policy center in Washington.

The chamber predicts the economy, as measured by the gross domestic product, will grow at 2.7 percent in the first quarter of next year, spurred by the estimated $20 billion cost of reconstruction in hurricane-stricken Florida and Louisiana.

It then looks for the economy to retreat back to 1.7 percent and 1.3 percent in the second and third quarters, before dropping to a dismal 0.8 percent in the fourth.

In its quarterly Economic Outlook, issued yesterday, the chamber said: "Expansions at less than 2 percent lasting for periods of up to a year historically are not sustainable. . . . They are more correctly classified as periods of pre-recession leading almost without fail to recession.

"Unless there are pro-growth federal policies enacted that reduce regulations, curtail federal spending growth and cut taxes, there is a distinct possibility of recession in 1994," said the chamber.

It urged Mr. Clinton to index capital gains and depreciation fTC deductions for inflation. Indexing removes inflation from tax calculations on gains and deductions.

This, said the chamber, would be equivalent to providing an 80 percent tax exclusion for capital gains and a permanent universal 5 percent investment tax credit.

The chamber claimed that indexing capital gains for inflation would "unlock" an additional $800 billion in assets in the first year after enactment as investors took advantage of lower taxes to switch from long-held holdings to new investments, or spending, stimulating growth and creating jobs without adding to the deficit.

Mr. Clinton's campaign plan for economic growth called for a 50 percent capital gains exclusion for long-term investment in small start-up businesses, with higher income taxes on the rich and a tax break for middle-class families with children.

In the coming weeks, the president-elect must appoint his top economic officials and draw up the growth plan with which he hopes to jump-start the sputtering economy.

There is widespread expectation that he will increase federal spending to create jobs, possibly increasing the deficit in his first year while committing himself to long-term debt reduction.

"If we could deficit-spend our way out of recession, it would already have happened," said Mr. MacReynolds, an opponent of increased federal spending. "To the extent that the Clinton program focuses on cutting taxes on capital and labor, the better chance they will have of getting the economy moving and averting a recession in 1994."

Conflicting with the U.S. Chamber's assessment, the Economic Forecasting Center at Georgia State University predicts that economic growth will expand next year from 2.8 percent to 3.5 percent.

Donald Ratajczak, the center's director, said yesterday that he was "far away" from the chamber's forecast.

Mr. Ratajczak said he assumed Mr. Clinton would introduce an investment tax credit and accelerate federal spending, increasing the deficit by as much as $50 billion next year. This, combined with lower individual and corporate debt levels and the more competitive shape of U.S. industry, should produce the stronger growth.

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