Since Bush Doesn’t Have One, Clinton’s Economic Plan Wins by Default

Today’s column is going to examine several economic plans now before the public, but first, there is an important question of nomenclature to be addressed. One of the plans is popularly known as the Perot plan because it was commissioned by candidate-for-a-day Ross Perot.

It is certainly traditional, if not quite fair, that in public life major policies are named after their most eminent advocates rather than the men and women who actually formulate them. We have had, as examples, a Marshall Plan, a Truman Doctrine, a Kennedy Round, and Reaganomics. These policies, however, were at least enthusiastically championed by their eponyms.

Perot, on the other hand, took one look at the plan issued in his name and abandoned the field in unseemly haste; it promised everything he had publicly disavowed, including higher taxes, cuts in Social Security benefits, austerity and sweat for all. So in simple fairness we will hereafter refer to this plan as the White plan, after John White, the distinguished public servant who was its main architect.

So, is the White plan better than the Clinton plan? The answer depends on how we judge economic priorities. If we regard the massive federal deficit as not merely our most serious problem, but a problem that supersedes all others, then the White plan perhaps deserves the nod. But if we consider prolonged recession another serious claimant on our attention, then the situation becomes more complicated.

The White plan’s spending cuts and tax increases risk killing off a feeble recovery. Even its authors concede that it will probably mean slower growth and higher unemployment through the middle of the decade. Small wonder that when Perot himself saw it, he suddenly recalled a previous engagement. As he himself has said, “You can’t destroy the economy trying to save it.”

During the last four years, real output in the United States increased at an annual rate of 0.4% per year--the worst performance of any Administration since World War II. Now our recovery threatens to go belly up once again.

Repeated interest rates reductions, engineered by an anxious Federal Reserve, have failed to boost spending by wary consumers and investors who remain pessimistic about the future. And slowdowns in Europe and Japan have sharply curtailed the exports that were the main source of our economic growth during the last three years.

The Clinton plan, acknowledging the seriousness of the recession, seeks to balance the need for growth with the need for gradual reductions in the deficit. At the core of the plan is an increase in public and private investment totaling about $220 billion over four years. About $88 billion of that will be invested in people--ensuring healthy infants and children, fully funding Head Start, giving school dropouts a second chance, providing apprenticeship programs for young people not going to college, enabling all eligible students to attend college with loans, retraining workers and helping move people off welfare and into jobs.

Another $80 billion will be invested in the nation’s transportation and communications infrastructure. A recent nonpartisan study estimates that every $1 billion of federal spending on infrastructure generates 52,000 jobs. Therefore, the Clinton plan would be likely to produce more than 4 million jobs over the next four years from increased infrastructure investment alone.

But that is not the Clinton plan’s only source of job creation. Through a targeted investment tax credit, a permanent R&D; tax credit and a 50% tax exemption for investments in small businesses held for at least five years, the plan also projects a substantial increase in private investment, resulting in even more employment opportunities for American workers.

To pay for its investment initiatives, the Clinton plan includes spending cuts and revenue increases amounting to about $295 billion. About $38 billion will come from extra cuts in defense spending over and above those slated by the Bush Administration. These additional cuts are well within the range that most experts believe reasonable. Indeed, they are nearly identical to those projected in the White plan and considerably smaller than those endorsed by many members of Congress.

Increases in taxes on the top 2% of the nation’s income earners--the only group whose after-tax incomes grew during the 1980s--will provide another $83 billion to fund Clinton’s public investment programs. The White plan also calls for higher taxes on top income earners. Clinton’s tax hike, while tougher on the very rich, rolls back less than a quarter of the tax break they enjoyed in the 1980s.

Clinton’s plan also projects additional revenue of up to $11 billion per year by closing tax loopholes on foreign corporations. This reform is overdue. As foreign companies continue to increase their presence in the American economy, they must accept their fair share of financing the training and infrastructure on which their local economic performance depends.

Assuming small additional spending cuts in a wide range of government programs and a moderate economic recovery triggered by investment, the Clinton plan predicts that the deficit will fall by more than half by 1996. In contrast, the White plan generates a budget surplus by 1998, but at the cost of slower growth and a $268-billion reduction in entitlement spending. Unspecified “cost-containment measures in Medicare and Medicaid” account for more than 50% of these cuts.

In lieu of such vague claims about health cost containment, the Clinton plan specifies three guidelines for a new national health care system: a guaranteed basic health care package for all Americans; a cap limiting the increase in health care spending to the growth in national income, and managed care allowing consumers to choose among a variety of local health care networks. As Clinton himself has correctly argued, fundamental reforms along these lines are the most important long-range option for curbing the deficit.

But what about the short run? Shouldn’t we attack the deficit head-on with a painful dose of austerity? I don’t think so. Austerity will retard or even terminate the already anemic recovery, and slower growth in turn will exacerbate the deficit.

According to the Congressional Budget Office, every percentage point reduction in the growth rate means a $133-billion increase in the deficit by 1997. Ironically, the White plan, by depressing growth, actually makes the deficit harder to tame.

On the other hand, it is wishful thinking to believe that economic recovery alone will solve the deficit problem. Even with moderate growth, the Clinton plan predicts a deficit of about $140 billion by 1996. And without a permanent cure for the nation’s budgetary imbalance, government borrowing will continue to drain the nation’s savings, the debt bequeathed to future generations will continue to increase, and long-term real interest rates will remain high, discouraging the private investment essential for the maintenance of a competitive, high-wage economy.

Therefore, additional deficit-cutting measures will probably be required once the economy has embarked on a sustainable economic recovery.

The timing of such measures, however, is critical to their effectiveness. Too often in the past the correct policies introduced at the wrong time have had costly consequences. Therefore, if Clinton is elected President, he should act quickly and responsibly to develop a bipartisan contingency plan for deficit reduction to be effectuated gradually as economic conditions improve.

If President Bush is reelected, however, don’t expect any progress on either growth or the deficit. Despite his rhetoric, Bush has requested $1.1 billion more than Congress has appropriated, and he has never submitted a balanced budget. His only significant economic proposal is a cut in the capital gains tax--a cut that would worsen the deficit, do little to stimulate private investment and growth, and do nothing to address our crises in education, health and infrastructure.

When Bush took office, he had an opportunity to cooperate with the National Economic Commission, a bipartisan panel of experts established by Congress to develop an effective and equitable deficit-reduction plan. Instead, he ridiculed the commission’s work, repeated his pledge of no new taxes, and hid his head in the sand while the economy slipped into a recessionary and budgetary quagmire.

Bush missed his chance to exercise economic leadership during the last four years. And he has no credible economic plan for the future. Clinton, by contrast, has a detailed set of proposals for moving the economy forward into the next century.

Is the Clinton economic plan better than the Bush economic plan? Even if it were substantially less effective than it in fact is, the Clinton plan wins by default.