CLINTON’S ECONOMIC PACKAGE : NEWS ANALYSIS : A Time of Cautious Assessment

From corporate offices to kitchen tables, Americans examined their finances Thursday--amid a lot of confusion and mixed emotions.

Idealism mingled with hard-edged practicality as they faced the prospect of fundamental changes in the U.S. economy, along with the specter of large tax increases. Precisely what lies ahead may be uncertain, but insights into the economy and how Americans would cope were in abundance.

Companies and individuals recognized that taxes were going up, but they were cheered by the prospects that President Clinton’s economic program would put a cap on the federal deficit. “If all his program does is stop the deficit from going up, it will be good,” said the chief financial officer of a major company. “That will keep interest rates and inflation low--we can see a lot of room for new business investments.”

As if on cue, bond markets delivered lower interest rates Thursday, the benchmark 30-year U.S. Treasury bond falling to 7%. Low interest rates could go far to offset the effect of a rise in the corporate tax rate, to 36% from 34% as called for in the Clinton program.

The stock market, however, lost ground after an opening rally--stocks closed down 10 points on the Dow Jones industrial average--reflecting the uncertainties that shadowed many Americans’ genuine hopes for success of the Clinton program.

Would the threat of tax increases chill the economic recovery--or lengthen the recession in Southern California?

Most business people believed that the economic recovery would continue because it is soundly based on rising productivity and competitiveness. December trade figures, announced Thursday, showed a surge in exports. “We depend on international trade,” said a computer company president commenting on Clinton’s pledge to complete negotiations on a worldwide trade agreement and the free trade pact with Mexico. “I’m glad Clinton said what he did, but he might have said more.”

But there were other questions.

Would Clinton be able to get his program through Congress? Corporate executives and individuals recognized that it would be months before personal and corporate financial moves could be made with confidence.

What further tax increases might accompany Clinton’s health reform plan when it is introduced in May? “What other shoes will drop?” asked one small business owner.

Ironically, given Clinton’s denunciation of Washington lobbyists, it seemed likely that higher taxes would bring back the tax-evading loophole society. “We’ll go back to spending endless hours in machinations, trying to qualify income for capital gains or some other special tax rate,” said a top corporate executive.

Still, even as people deliberated over their own finances, they were more than willing to heed the President’s call to think of his plan as a commendable effort to rescue the national economy--to think in Clinton’s words, not of “what is in it for me” but of “what is in it for us.”

Financially astute business executives and ordinary small investors alike recognized that truly reducing the $300-billion-plus federal deficit would change the economy.

Change would begin with lower long-term interest rates--below today’s levels to rates of about 6% for 30-year bonds, closer to 5% for 10-year bonds. That would further cut the deficit by reducing the annual interest, which now runs to more than $200 billion a year, on the total national debt.

And that, in turn, would reduce the social distortion that the interest tab implies. Interest on Treasury bonds, on the whole, is paid to richer, older or corporate bondholders, but it is paid out of taxes levied on generally poorer and younger individual Americans.

A rate of 6% on the long-term government bond is significant. At that rate, the premium now being demanded because of the deficit by investors in U.S. Treasury bonds would be eliminated. At 6%, American business would enjoy a truly low cost of capital, U.S. companies would have one more competitive assist in the global economy.

With a reduction of only 1% in long-term interest rates, about $40 billion would be freed up in the U.S. economy to finance programs we never seem to have money for today: educational improvement, worker training, inclusion of all citizens under medical coverage.

Some of Clinton’s visions resonated Thursday morning with an investment adviser who, after saying he would recommend to his middle-income clients that they buy tax-free municipal bonds, remarked: “That program to make college loans available in return for national service, that’s a great idea. I had scholarship help to go to college and it made me a better person, a better citizen.”

As to the energy tax, even though it will impose a burden on consumers, it could also be a wellspring of opportunity, noted Pasadena financial planner Kevin McCarthy. “It will spur inventiveness by engineering companies to make more energy-efficient machines and engines.”

What most people thought of doing with higher income taxes was to avoid them, legally. Sales of municipal bonds surged Thursday.

And the 28% capital gains tax rate, which applies to investment profits in stocks, bonds and real estate, took on a new attractiveness with corporate and some individual income tax rates going up. If the corporate rate goes to 36%, that leaves an 8% differential, noted a company finance officer. “On a gain of $50 million, sure we’ll maneuver to qualify for that rate.”

For high-income individuals, capital gains will become even more attractive. The real tax rate, counting California state taxes, for high-income individuals could rise to more than 40% for some, over 50% for others, said Los Angeles tax counsel Philip Holthouse.

The upshot is that investment behavior once again will be skewed by tax consequences, and that’s not a productive prospect.

But for many, the overriding hope expressed Thursday was that their new President was on the level. They want real efforts to curb the deficit, not a hike in taxes and spending as usual.

“I’m suspicious,” said a company president, reflecting widespread skepticism. “First we’re going to spend $30 billion on new federal programs, then we’re going to raise a lot of taxes and only after that will we cut government spending. If the sequence were different, I’d be more confident.”

If Clinton can reassure that executive, and all the other skeptical Americans, then the U.S. economy is in for a bright time ahead. But if he disappoints their hopes, he’s in for a long four years--and so are we.