Boskin Sees Economic Rebound : Economy: The chairman of the President’s Council of Economic Advisers also says the Fed could cut interest rates without fueling inflation.

The President’s chief economic adviser contends that the economy is poised for a recovery but argues that the Federal Reserve Board still has room to cut interest rates further without risking a rekindling of inflation.

“I think many of the preconditions for a recovery are falling into place,” Michael J. Boskin, chairman of the President’s Council of Economic Advisers, said in an interview last week. “Some of the problems that caused the economy to go into recession have been reversed and should, over the next few months, help the economy turn around.”

Boskin ticked off recent signs of an improved economic outlook: a quick Persian Gulf War victory; lower oil prices and interest rates; rebounding consumer confidence; a growing national money supply, and relatively low business inventories, which put corporate America in a position to feel the benefits quickly when orders pick up.

But Boskin argued that there is still plenty of slack left in the economy to absorb the money growth without a spike in prices. “You have to make sure you don’t let the inflation genie out of the bottle, but I see nothing that is likely to cause that yet,” he said.

Meanwhile, Boskin said the Bush Administration will oppose a Democratic proposal to cut the Social Security payroll tax this year.

Sen. Daniel P. Moynihan (D-N.Y.) is pushing a proposal to cut the tax as a means of giving the middle class a break and forcing Washington to stop using the ballooning surplus in the Social Security fund to finance the government’s deficit.

Boskin dismissed Moynihan’s campaign, arguing that it would break the budget and leave the Social Security system under-funded in the future, when retiring baby boomers are expected to place unprecedented strains on the system.

“We don’t see any reason to be messing around with Social Security,” Boskin said. “The proposals out there would alter the character of Social Security and don’t appear to make a whole lot of sense. And any payroll tax cut . . . means the deficit will go up and the benefits will be at risk.”

But he insisted that the White House is working hard to persuade congressional leaders to agree to a cut in the capital gains tax rate, which critics charge would mainly benefit the wealthy.

Boskin said the White House is “working hard” to persuade Democratic leaders to agree to the creation of a commission, headed by Fed Chairman Alan Greenspan, to study the budgetary impact of a cut in the capital gains tax.

Since President Bush announced the proposal to create the Greenspan commission in his State of the Union address, the idea has lingered in a political limbo; Greenspan has refused to proceed with the study commission until the Democratic leadership agrees to join it. But most Democratic leaders oppose a capital gains cut and have refused to cooperate.

Even if the White House doesn’t win on capital gains, Boskin said last fall’s stringent budget agreement has dramatically changed the nature of the debate between the Administration and Congress over tax and budget policy.

With tough new spending ceilings imposed on each major section of the federal budget, Congress has not been able to turn each new bill into a “Christmas tree” laden with massive new spending for pet projects. To reinforce that idea, the Administration is threatening to impose automatic spending cuts on the domestic budget because of one small provision in the education budget inserted for a Chicago college by Rep. Dan Rostenkowski (D.-Ill.), the powerful chairman of the House Ways and Means Committee.

But overall, Boskin said, legislation is emerging from Congress with much less pork-barrel spending than in the past, mainly because of the budget accord’s spending caps.

“We see a major change in the proclivity of Congress to spend because of the budget law,” Boskin said. “Over time, people will increasingly see how it will be more and more difficult for Congress to spend and spend.”

BOSKIN’S VIEW OF THE ECONOMY Michael J. Boskin, chairman of the President’s Council of Economic Advisers, says the economy is on the verge of recovery and believes that interest rates can still go lower without igniting inflation. Here is a summary of his views expressed in an interview:

The economy has been boosted by growing consumer confidence prompted by the Persian Gulf War victory, lower oil prices and interest rates, money supply growth and low business inventories.

The economy continues to be hurt by the credit crunch and a slump in the construction industry. The GNP will drop again in the first quarter. Unemployment will peak at about 7% before declining by year-end.

The current recession will be mild, with the recovery beginning in the second quarter.

Inflation is not a serious threat currently, and the Fed could cut interest rates further without causing higher prices.