California Impact : What Economists in State Think of the Budget Package

Four California economists were asked to react to President Bush’s economic plan, as outlined in his State of the Union address Tuesday night. Here are some of their perspectives:

JACK KYSER, chief economist, Economic Development Corp. of Los Angeles County:

“There are basically no surprises in (Bush’s plan). He’s pushing a lot of his usual programs. The most important thing was the style and tone the President set. It was an attempt to get back in control, and I think he did a good job of that.

“There were several things I didn’t hear, and one was relief for aerospace workers.

“My sense is that the business tax credit and the capital gains initiative will be very well received by business. I think also that the tax credit for first-time home buyers and the ability to dip into the IRA could give the real estate industry a boost.

“There’s a feeling that for the Southern California real estate industry, this is it, this is the chance for a recovery. Interest rates are low, sellers are willing to make deals and this could really just give it the push it needs.”

JOHN RUTLEDGE, chairman, Rutledge & Co., Claremont:

“There’s an old saying in Texas that they use for city slickers, and that’s ‘all hat and no horse.’ I think it applies to this speech. It’s not very aggressive--sort of a kinder, gentler economic package.

“The positive part of this program is that it’s looking as if they’ve recognized that the reason there’s a recession is falling property values and a net-worth decline. The credit crunch follows from that, because the banks’ real estate collateral is worth less. . . . Last year, there was a $181-billion decline in net worth--and it all comes out of the value of people’s homes. That scares the hell out of people and makes them not want to buy sofas and cars.

“The good part of what he announced is the measures that would support property values and net worth. The capital gains cut is important not for what it does for holders of securities but for what it does for homeowners. That’s the core of this economic program, but that’s also where it’ll run into the most fierce opposition in Congress.

“The eye of the hurricane of this recession is California and the Eastern Seaboard. We didn’t do very well in the sense of the bigger defense cuts, but property value support could help.”

LYNN REASER, senior economist, First Interstate Bank:

“The essential thrust of the congressional activity we’ve seen so far indicates that Congress plans on making substantial changes to this plan, and so it’s difficult to see what the outcome will be. One major negative that stands out, however, is a substantial increase in uncertainty. Many businesses and homeowners may hold off on making decisions for several months until they see what kind of tax cut or other break they get, and that could hurt.

“In the bond market, long-term rates are back up where they were before the Fed cut the discount rate Dec. 20. The market’s concerns about fiscal policy balanced out the gains from monetary policy. The bond market anticipates a congressional bidding process that will increase the deficit.

“The major thrust of the stimulus (in Bush’s plan) would be offset at this point by three negatives: one, the defense cuts; two, the upward push on interest rates because of concern about the budget deficit, and three, the uncertainty. “My view is that California’s economy is poised to see some kind of recovery without additional federal stimulus. But now there’s a risk that damage will be done because of what’s happening with long-term interest rates.”

DAVID HENSLEY, director, Business Forecasting Project, UCLA:

“It sounded like the most significant dollar amount was in the change in (income tax) withholding, and that’s really just a timing issue: You get less taken out now, and you get back less later. That’s a little bit of help, I suppose, if people feel like they’re making more money and change their spending habits. But I think most people will understand that it’s just a shifting.

“There’s not much of an effort at boosting consumption here; it’s mostly aimed at investment--the accelerated depreciation for business capital spending, the capital gains cut, the tax credits for home buyers--and I think that’s good. If it had been mainly a tax rebate to boost consumption spending, I think economists would have been worried, because they feel that our real problem is to increase saving.

“The housing market here is not showing any signs of improvement, unlike in the rest of the U.S. . . . If the tax credit for first-time home buyers were to have any effect, that would be real helpful here, but I’m afraid it’s not enough money to make a real difference.

“On defense, the fact that he caved in and is only asking for 20 B-2 (bombers) is a real blow to Northrop. . . . However, I don’t think it means the whole B-2 program goes down in 1992 and California takes another huge hit. I think it will be spread out over ‘93, ’94 and ’95.”