Clinton’s Economic Plan, Stressing Education and Training, Is a Good One

Nearly four years ago in his inaugural address, George Bush lamented that “we have more will than wallet” as he despaired of applying economic policy to the nation’s social and economic problems.

He had it backward. His lack of will is one of the main reasons that the problems have deepened and the American people have grown so pessimistic about the nation’s future.

Bill Clinton is offering an economic strategy that promises to do better. He has signaled the style and direction his Administration would take in the position paper “Putting People First.”

It emphasizes investing in education and training, from expanded Head Start through transitional assistance for workers displaced by lower defense spending and other economic changes; updating the nation’s decaying infrastructure through investing in road, rail and air transportation networks, in sanitation systems and related public facilities; promoting private investment in new plant and equipment and in research and development; providing incentives and resources to reduce crime and urban decay, and containing health costs and extending the availability of health insurance throughout the population.

Along with its higher investment outlays and tax incentives, the Clinton program calls for offsetting spending cuts, mainly in the defense area, and increased revenue from two main sources.

One is improving the tax compliance of foreign corporations operating in the United States that have avoided taxation by manipulating the costs they allocate to their U.S. operations. The other is individual tax increases confined to the 2% of families with the highest incomes.

Not only did people in this income group achieve the largest pretax income gains during the 1980s--a period when many middle and lower income groups saw their real incomes falling--but they also received the largest tax reductions in this period. Under the Clinton plan, they would lose a small portion of the tax breaks they received during the 1980s.

The Clinton initiatives signal a new agenda for domestic policy. They address problems no farsighted government should ignore, ranging from long-neglected crises in education and urban decay to chronic problems that gradually sap our economic strength and erode the quality of life in this country.

While improvements in these specific areas are vital for their own sake, they would also alleviate long-run budget problems. Rising medical costs are the biggest source of projected increases in spending and continued large deficits. And productivity-enhancing investments in people and our physical capital stock are key to providing rising real incomes and a growing tax base.

Alongside the specific problems targeted by the Clinton plan, the nation has also been suffering from poor overall economic performance. These macroeconomic problems are interrelated with the more structural ones.

Workers who lose jobs to defense cuts cannot easily find new jobs if the overall economy is weak. Whatever the long-run incentives are to invest, firms will invest less if times are bad. And recessions erode the tax base of state and local governments, forcing both tax hikes and cuts in education, investment and other important areas.

How does the Clinton plan rate as a tool of macroeconomic fiscal policy as it might affect overall economic performance? Its impact in this regard can be approximated by its effect on the budget deficit.

By Clinton’s estimates, the net effect of his plan provides only moderate reductions in projected future budget deficits. Depending on how soon different parts of the plan became effective, it might even add to the deficit initially; but for the four-year period 1993-1996, the proposals would reduce projected deficits by an average of about $20 billion a year.

As these savings were achieved, they would produce additional deficit reduction through lower interest payments on the smaller debt. With the most recent estimates by the Congressional Budget Office projecting a $254-billion deficit for 1996 under current policies, the Clinton plan would still leave it near $200 billion.

It is for this failure to make deficit reduction his first priority that some observers who welcome the new initiatives of Clinton’s programs nonetheless fault it. But these concerns are misplaced.

For now, his is the right policy. The weak economy that Clinton will inherit if he becomes President will benefit from budget initiatives that temporarily enlarge the deficit. Moving to cut the deficit now could tip the economy into deeper recession. So the fact that a balanced budget is not an early priority in the Clinton economic plan is an advantage and not the drawback that some observers have made it out to be.

As the economy recovers and nears full employment, the fiscal prescription will change, and reducing the deficit should become a top priority. Clinton surely realizes that his goal of raising the level of national investment can only be reached in the long run if the deficit is eventually reduced.

The fact that the initial Clinton plan focuses on currently needed initiatives rather than on that more distant objective is hardly surprising. When the time comes, major deficit reduction will require active leadership from a President who can work with the Congress to make the hard choices that will be needed.