The balanced budget deal reached between the Clinton administration and Congress is only a small step in the right direction, economists and investment strategists say.
Most claim the budget accord was made possible by healthy economic growth and strong financial markets, and that it neither will help nor hinder markets over the long term.
And, the failure of budget negotiators to address Social Security and Medicare could come back to haunt both the economy and the markets years from now, they add.
Revenue projections used in the balanced budget deal are suspect, according to market economists, and the whole deal is based on the assumption that interest rates will remain constant or drop and economic growth will continue to be healthy through 2002.
"These are not safe assumptions," said James Solloway, director of economic research at Argus Research Corp., New York. "Anything can happen, but after six years of economic expansion and 10 years of generally falling rates and rising stock markets, is it safe to expect that to continue well into the future? Probably not."
He said the strong economy and stock market performance, which generated extra revenue for the government, made the deal possible. Under those conditions, government leaders should be focusing on generating a budget surplus, not just a balanced budget five years into the future.
"It's politics as usual; it's a time when the decisions were easy for them to make. They have gotten this far because of economic assumptions and the reality of economic growth which made the process easy. This is about as good as it will get economically," said Mr. Solloway.
But, he and others said the failure of the government to address the looming insolvency of Social Security and Medicare is nearly inexcusable.
"The crisis is not yet upon us; it is more like a time bomb," he said. "It's a problem that will make itself felt increasingly after the year 2000. . . . When 2010 rolls around and baby boomers begin retiring and claiming some of the savings being accumulated today for consumption, we will run into all kinds of macroeconomic problems," said Mr. Solloway.
The budget agreement is "probably better than getting kicked in the face by a mule," said Paul Boltz, chief economist at T. Rowe Price Associates, Baltimore. "It's a good first step but still does not achieve the objective of the Gramm-Rudman-Hollings amendment of balancing the government's operating budget.
"The Social Security time bomb is still ticking and is being left to another day, which is unfortunate.
"When you can't balance the budget when the economy is this strong, when can you?" Mr. Boltz asked. "If the government were going to run a real budget surplus, then that would be something."
"How is the budget being balanced?" asked Bruce Steinberg, chief economist at Merrill Lynch & Co., New York. "It's the strong economy that is creating all these wonderful results and driving down the deficit. As we go forward things look reasonably good; there probably isn't a lot of interest rate risk right now."
But, said Mr. Steinberg, "the ultimate fiscal problems the United States will face - Social Security and Medicare - were not addressed in these budget talks. These problems will still be there but they are too politically loaded."
The budget agreement includes reduction of $115 billion in Medicare spending, about $85 billion in tax cuts and an as-yet-undetermined cut in capital gains taxes. The budget talks between the White House and Republican congressional leaders received a boost from the Congressional Budget Office, which projected an extra $225 billion in tax revenue that was not anticipated in the early stages.
Paul Kasriel, vice president for economic research at Northern Trust Co., Chicago, said there "might be room for skepticism" on the revenue projections, claiming "it is not clear where these revenues are coming from."
As for the proposed tax cuts, Mr. Kasriel said: "By and large, these proposed cuts would seem to be a negative for the financial markets since they are largely cuts to limit demand for goods and services and do very little to stimulate supply. . . . Overall it looks like it will be neutral for the financial markets."
Mr. Kasriel, too, warned a financial crisis might lie ahead, well beyond the 2002 balanced budget date.
"The problems are going to come later than that," he said. "My suspicion is that both Congress and Clinton will now tend to rest on their laurels after saying 'We have now balanced the budget,' " said Mr. Kasriel. "And with another presidential election in 2000, I'm not sure there will be a lot of interest in reforming middle class entitlement programs at that time. Congress will put on the back burner reforms in Social Security and Medicare, so if the financial markets look beyond 2002 that could be a definite downside."
T. Rowe Price's Mr. Boltz said the proposed capital gains tax cuts should benefit the markets over the long term, but even that remains to be seen since details and exact amounts are unknown.
Mr. Boltz also said the balanced budget agreement "should make it easier on the Federal Reserve to keep the economy on an even keel" in the long haul. But overall, he said, "it is just a small step and it's short of the mark."
Patricia Chadwick, chief investment strategist at Chancellor Capital Management Inc., New York, said the budget accord is largely "politician back-scratching and accommodation."
She said President Clinton wants to be remembered as the president who balanced the budget, but the deal comes down to "some smoke and mirrors" after leaving out any reference to Medicare and Social Security reform.
But capital gains tax cuts will "unquestionably" be good for the market and economic growth.
"My view is when you look at budget agreements, there are two variables to keep in mind: How real are the cuts and how real are the economic assumptions being used. In the past you haven't been able to believe in either," said Ravi Akouri, chairman and chief executive officer at MacKay-Shields Financial Corp., New York. "This time my reaction is that the cuts appear to be more realistic and there appears to be more cooperation to see that they will go through."
But he said the economic assumptions are a little more shaky because the budget projection calls for no recession, which might not be realistic.
"Net-net, this is one of the better packages they have come up with, but the financial markets won't get overexcited until more details unfold," Mr. Akouri said.
He said there may be some validity to claims that the capital gains tax cuts and other provisions in the budget accord may benefit small-capitalization stocks in the long run.
"People have been looking for reasons for the small-cap sector to catch up and it hasn't happened," he said. "It could benefit small-cap stocks more than others, but small-cap stocks have lagged for a reason: The world in general has basically assumed the idea that the larger global companies will be more successful in this global economy and that they have an edge. Once momentum gets hold, it feeds on itself," he said. "But if any sector stands to benefit from this, it may be the small-cap sector; we don't know yet."