ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Wednesday, August 28, 1996 TAG: 9608280038
SECTION: BUSINESS PAGE: B-8 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DAVID ORR told the First Union National Bank of Virginia board of directors the GOP candidate's plan to cut spending is "very squishy".
It's the spending, Stupid.
That echo of Bill Clinton's 1992 campaign theme about the economy constitutes economist David Orr's advice to Republican presidential candidate Bob Dole about his proposal to cut taxes and still balance the budget.
Orr, chief economist for First Union Corp. in Charlotte, N.C., said the revenue side of the Dole plan will take care of itself.
On the spending side, however, the question is whether Congress and the president have the will to make the cuts necessary to bring about a balanced budget by the year 2002. And that, Orr said, is a question of politics, not economics.
Orr, who on Tuesday spoke to the board of directors of Roanoke-based First Union National Bank of Virginia, said no economist questions the Dole campaign estimate that the tax cut will cost the treasury $548 billion. The Dole forces have estimated the average savings per family in Virginia at $1,639.
That includes reductions in income tax rates and the capital gains tax, a $500-per-child tax credit, an enhanced Individual Retirement Account, repeal of the 1993 Social Security tax increase, and education and training incentives.
The controversy, according to Orr, is on the other side of the ledger: whether offsetting items will allow the budget to be balanced despite the tax cuts.
Orr said Dole's advisers probably underestimated when they said the tax cut would stimulate growth of gross domestic product by 27 percent. "That is very conservative," Orr said, noting that the Congressional Budget Office and other studies estimate the boost at 30 percent to 50 percent.
Estimates of most other offsetting items are probably not too far off either, although some are controversial. But Orr said Dole's proposed spending cuts of $217 billion are "very squishy."
"The government has never been able to do that," Orr said of a spending cut of that level.
Orr said the chances of limiting growth in government spending that severely "don't look good in the light of history." Between 1969 and 1989, he said, federal spending grew by 3.4 percent more than the rate of inflation. Even in the period of 1989 to 1995, he said, when the country benefited from lower defense spending and lower interest rates, "real" spending - after inflation - grew by 1.5 percent each year.
If inflation runs 3 percent in the coming few years, he said, Dole's plan calls for a near 1 percent reduction in real spending - below the rate of inflation.
Orr said he believes that Dole's comment that he would not cut Medicare or Medicaid has been widely misinterpreted. He said Dole apparently plans no further cuts beyond the $124 billion that was contained in the program of the Republican Congress. And even that reduction, Orr said, "ruined Newt Gingrich."
But Orr said economic theory argues against the Dole proposal.
Students learn in basic economics courses, he said, that you stimulate the economy only during a recession. Tax cuts are granted when unemployment is high. "Today is absolutely the wrong time for that," Orr said, because it would lead to higher inflation rates.
He said the Republican response to that is that the proposal is not a normal tax cut because it is being offset by spending cuts. The plan shifts many government programs to the private sector, not add stimulus to the economy.
LENGTH: Medium: 70 lines ILLUSTRATION: PHOTO: (headshots) David Orr\It's the spending. color.by CNB