WASHINGTON -- The increase in interest rates likely to come from any tax cut next year would not completely negate the benefits to the economy that the cut would produce, Congressional Budget Office Director Robert D. Reischauer told Congress yesterday.
Mr. Reischauer did warn that the rise in interest rates would partially negate the amount of stimulus to the economy provided by a cut in taxes. But he also said, "Would I expect [rates] to rise to much as to fully offset the stimulative effect? No."
Mr. Reischauer's comments came as he testified before the House Ways and Means Committee during a hearing on proposals to boost the economy and promote tax fairness.
Congress should not expect any economic stimulus proposals it passes to make a recovery occur earlier than mid-1992, which is the point many economists expect the economy to rebound anyway. Mr. Reischauer said. But those proposals could boost the strength of the recovery and would be particularly helpful if the recovery is a weak one.
"Enacting a stimulative fiscal policy early could provide insurance against unexpectedly slow growth next year," Mr. Reischauer said. "If the stimulative effects from fiscal policies enacted in the next few months are felt late in , they might well help push a reluctant recovery along."
Other witnesses who testified before the committee yesterday sounded a refrain that has become common among some economists, that Congress would do more harm than good in enacting a tax cut.
"If I could offer you jut one bit of advice on your economic policy deliberations, it would be to renounce any intention of using fiscal policy for a 'quick fix,'" said Lyle Gramley, chief economist for the Mortgage Bankers Association of America. "Short-run help must come principally from lower interest rates, led by further easing actions by the Federal Reserve."
Herbert Stein, senior fellow with the American Enterprise Institute, said. "The loss of revenue that would result from tax reduction for the middle class would impede action to deal with our social problems and interfere with reduction of the deficit after higher employment is regained."
Several economists also said the weak financial situation of most states and cities, and the steps they are taking to shore up their budgets, continue to be a drag on the economy.
"Under pressure from shortfalls in revenue brought on by the current downturn, state and local governments have raised taxes and cut spending by at least $15 billion since the beginning of the fiscal year last July. Further, such cutbacks are continuing," Mr. Reischauer said.
State and local governments "have their back to the wall," Mr. Gramley said, "and are cutting expenditures and raising taxes at the wrong time from the standpoint of the economy's health."