Rely on the Fed and Don't Panic, Former Advisers Say

RELY primarily on the Federal Reserve System and an easier monetary policy to move the United States economy out of its present slump. But take various measures to boost the nation's long-term prospects for vigorous growth.Those are two suggestions for President Bush from five former top presidential economic advisers interviewed by the Monitor. None of the five were in favor of a "quick fix" tax cut to boost the slack economy. Mr. Bush is expected to offer a tax package in his late-January State of the Union address. According to Washington press reports, he could call for a cut in the capital-gains tax rate, expanded individual retirement accounts with fewer penalties for early withdrawal, a middle-class tax cut, and perhaps a targeted investment tax credit for businesses. Lawmakers already have numerous tax proposals in the legislative hopper. The first piece of advice to Bush from Raymond Saulnier, chairman of the Council of Economic Advisers (CEA) under President Eisenhower, is, "Don't panic." But he also suggests that Bush "lean hard" on the Federal Reserve System (Fed) to lower interest rates. "Make it clear that you expect their support. In my view, their support has, to date, been less aggressive than the circumstances have warranted." Paul McCracken, CEA chairman under President Nixon, also urges the White House to press for easier money. "But do it quietly," he says. "Don't go to war with the Federal Reserve." President Reagan's first CEA chairman, Murray Weidenbaum, figures the Fed was late in lowering interest rates and that perhaps it can drop rates another half percent or so. "But don't be preoccupied with interest rates," he says. At this stage, he doesn't reckon a further small decline in rates will make much difference as to whether a consumer decides to buy "a big-ticket item" or a company launches a major investment. Like other ex-presidential economic advisers, Mr. Weidenbaum is more concerned with measures to improve the country's long-term economic health. Similarly, Charles Schultze, President Carter's CEA chairman, advises Bush: "Don't just do something. Stand there! The most important thing, more important than getting us out of the recession, is: Do not do anything that will make our long-term problems worse." Reagan's second CEA chairman, Beryl Sprinkel, is more satisfied with Fed policy than the other four advisers. He says monetary policy has been "quite effective" under Fed Chairman Alan Greenspan, though at the moment it is "on the ragged edge of creating too much money." Some of the five's suggestions also include: * "Give a carefully prepared speech at some early date showing knowledge of, and concern about, the condition of the economy, emphasizing the importance of its structural imbalances [the federal budget deficit; the deficit in international trade accounts; the huge overload of debt on individuals and business, etc.] in it as well as its cyclical situation. Dr. Saulnier, now a professor emeritus at Barnard College. * "Have a task force at work in the White House identifying everything that can be done within the discretionary powers of the president and of the executive branch agencies that can be helpful to the economy. Saulnier. * Seek a bipartisan approach to the economy. The Republican call for a cut in the capital-gains tax and the Democratic insistence on middle-class tax cuts paid for by higher taxes on the rich both have become "too partisan." Instead, seek to restore the investment tax credit as a job-creation mechanism. - Weidenbaum, now director of the Center for the Study of American Business, Washington University, St. Louis. Dr. McCracken also recommends a revival of the investment tax credit, a measure pushed through Congress by President Kennedy as a way of stimulating business investment but removed from the tax code in 1986. And "go slow" on measures that would encourage savings. Dr. Sprinkel, however, criticizes the credit, saying it favors companies whose businesses need heavy capital investment over those, such as service companies, that do not. * Use money saved by the reduction in defense spending to trim the federal deficit and invest in infrastructure, such as highways. - Schultze, now at the Brookings Institution in Washington. Schultze describes the capital gains tax cut as "snake oil" that would benefit primarily the rich, encourage tax shelters, and do little to revive the economy. * Invest more in education and training to help US business be more competitive - Weidenbaum. * "Slow the juggernaut in regulatory spending. Sprinkel, now an economic consultant in Chicago. Both Sprinkel and Weidenbaum maintain that the growth in regulation under Bush has hurt the ability of business to expand. * Permit higher depreciation allowances by shortening the asset life of equipment for tax purposes. - Sprinkel.