January 11, 1996 in Nation/World

Stalled Talks Send Market Into Tailspin Budget Deal Unlikely Before November

David Hess And Robert A. Rankin Knight-Ridder
 
Tags:economy

The stock market plunged almost 100 points Wednesday after top Republicans and President Clinton openly acknowledged that it may take the November elections to break their stalemate over the federal budget.

House Speaker Newt Gingrich of Georgia started the market tumbling when news wires transmitted this comment from him at a Republican fund-raiser in Casper, Wyo.:

“I think the odds are better than even as of today that there will be no agreement. And I find that a difficult prospect. I am, for the first time in a year, pessimistic …

“It may just be that we need one more election,” Gingrich said. “It may literally be that the Clinton administration cannot agree to the kind of decentralization and lower spending and lower taxes that we represent.”

The Dow Jones industrial average of blue-chip stocks dropped 35 points almost instantly upon the news of Gingrich’s pessimism. After Clinton and Senate Majority Leader Bob Dole later made similar comments, the Dow closed down 97.19 points, or 1.9 percent, at 5,032.94.

That drop was on top of a 67.55-point Dow plunge Tuesday, when marathon White House budget negotiations “recessed” for at least one week with no agreement in sight. Weakness in technology stocks and concerns about corporate profits also are weighing down the market. Treasury bond prices also fell Wednesday.

Investors have been betting for months that Clinton and the GOP Congress would reach a balanced-budget pact, which would mean less government borrowing, lower interest rates and better prospects for economic growth; lower interest rates make stocks and bonds more valuable. But the newly acknowledged prospect of no balanced budget threw shadows over all those economic assumptions.

Clinton said Wednesday that GOP leaders insist on balancing the budget their way to serve ideological goals that the American people have not endorsed, goals that would devastate social programs he wants to protect.

“We’re only very far away (from each other) if you … insist on a tax cut, which requires unacceptable levels of cuts in education and the environment and Medicare and Medicaid … or you insist on cuts, which will really weaken our ability to protect the environment,” the president said, asserting that is what the GOP plan requires.

Before imposing such radical changes, Clinton said Wednesday, “we ought to have an election about that. That is not what the ‘94 election was about, certainly not what the ‘92 election was about.”

Dole said the budget talks should continue - but acknowledged that a deal may not be possible.

“It may be that we are so far apart in philosophy … that we may have to wait until the elections,” Dole said on CNN. “I don’t suggest that, but that’s a possibility.”

Although it has sometimes been obscured, the budget dispute between Clinton and Republicans has always been less about numbers than ideology. The numbers have in fact narrowed significantly in the past few days, but the philosophical differences have not.

The belief that the federal government is too big and too intrusive runs through the GOP balanced-budget plan. Clinton’s budget, by contrast, reflects a view that the federal government can be a powerful force for improving the lives of Americans.

Republicans believe it is necessary to cut education and environmental programs and strongly check the growth of Medicare for the elderly and Medicaid for the poor. They are also endorsing a $177 billion tax cut.

Spending slowdowns of the magnitude that Republicans are seeking would require fundamental changes in the major health care and welfare programs.

Republican leaders generally defend their approach on the grounds that it would stimulate economic growth and lessen the burden of debt on future generations.

Until now, most GOP leaders apparently confident that Clinton would never produce a credible budget plan - had made balancing the budget the core of their strategy to discredit his commitment to fiscal responsibility.

Their big tax cut, the GOP main tains, is designed not only to ease the tax burden on businesses and individuals but to deny the government the sustenance it needs to grow.

For Democrats, that is proof that Republicans want to starve programs that help ordinary people.

“A great number of (Republicans) want to use the tax cut as a means to radically change our effort to help the elderly and help the young in Medicare and Medicaid and education,” said House Minority Leader Richard Gephardt of Missouri.

What the Democrats are banking on is that the “fundamental changes” Gingrich says he wants in the biggest federal programs will be so unpalatable voters will not swallow them.

xxxx Markets react Here’s a look at how different financial markets reacted Wednesday to comments that the federal budget impasse may continue through the November presidential election:. The Dow Jones industrial average, the stock market’s most widely watched barometer, closed down 97.19 points, or 1.9 percent, compounding a 67.55-point drop on Tuesday. The price of the benchmark 30-year Treasury bond falling $11.56 per $1,000 in face value. Its yield, reflecting the interest rate the government pays bondholders, rose to 6.19 percent from 6.11 percent. Gold surged in New York trading to nearly $400 an ounce, its highest in 29 months. The dollar dropped against the mark and most other European currencies, but rose against the yen in Japan, where the government is facing its own set of economic controversies. Stocks: Market analysts see no reason to panic/A8


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