Treasury Secretary James A. Baker III yesterday said the Democrats' work on a tax increase package helped fuel the stock market's losses last week, a statement that prompted an angry response from the chairman of the Senate Finance Committee.
Baker, appearing on NBC-TV's Meet the Press, said tax bills approved by both House and Senate committees Thursday had a major effect on the market, where the Dow Jones industrial average suffered its largest weekly decline since World War II.
"I think that the writing of these tax packages had a major effect in what's happened to the stock market over the course of the past three or four days," Baker said.
"They are raising the corporate minimum tax, they are eliminating the deduction on completed contract accounting, which hits the entire defense industry, they are doing other things in the area of business taxes that make business extremely nervous," he said.
"So it's not unusual -- it doesn't seem to me -- to see an adverse stock market resulting from what they're doing."
But later in the day, Sen. Lloyd Bentsen (D-Tex.), chairman of the Senate Finance Committee, put the blame for the losses on the administration. "The immediate cause of last week's stock market drop was the sharp jump in the prime rate," he said i a statement. "Interest rates shot up because of our persistent trade deficit and budget deficit and this administration's refusal to develop policies to reduce them."
In the televised interview, Baker said, "We ought not to rush out here and raise taxes, depress the economy, when things ... are looking fundamentally pretty good."
He indicated that the administration expects the 1987 budget deficit to be about $6 billion below its earlier projection. The administration had been predicting a deficit of $157 billion in the fiscal year that ended Sept. 30, $64 billion less than the record $221.1 billion in record ink in fiscal 1986.
"On the 27th of this month, we will announce record progress on the 1987 deficit, far beyond anybody's fondest hopes and dreams," Baker said. "We're going to get a deficit reduction of somewhere in the neighborhood of $70 billion."
The Treasury secretary refused to comment specifically on the declining U.S. dollar, but hinted that the United States might allow the dollar to fall against the West German mark rather allow U.S. interest rates to climb as have West German interest rates.
"We will not sit back in this country and watch surplus countries jack up their interest rates and squeeze growth worldwide on the expectation that the United States somehow will follow by raising its interest rates," he said.
Bentsen, however, said the administration "is trying to blame the Germans and the Congress and everyone but themselves" for the nation's economic troubles. Last week's selloff, he said, was caused by the nation's deficits "and not by these efforts to deal with them. Anyone who says otherwise is out of touch with reality, living in a dream world.