POLICY : Clinton Administration Looks to Take an Activist Role in the Economy

A new cottage industry has quickly developed in the United States: forecasting the changes that will be made by Bill Clinton when he enters the Oval Office early next year. Judging by the gap between initial promises and ultimate performance in the case of every recent President, we can only guess which campaign promises will be carried out and what the effects will be on the American economy.

The general dimensions of the changes that we can expect in the next four years seem to be fairly clear. The Clinton Administration will promote a far more activist government role in the economy. The announcement of a new and young political team in the White House with an ambitious program may help to generate renewal of consumer confidence and, to some extent, even business confidence. With less uncertainty in the political sphere, consumers may begin to open their wallets and purses once again.

In the early years of the Clinton Administration, regulation will be on a growth trajectory. The environmental area, championed by Vice President-elect Al Gore, is a natural for accelerated expansion. Several more specific areas have been singled out for tougher regulation--including health care, insurance and pharmaceutical companies.

Public works will be expanded substantially. Clinton has promised to create a Rebuild America Fund to finance a variety of infrastructure projects. This covers far more than merely repairing roads and bridges. He wants to create a high-speed rail network, to develop “smart” highway technology, to build a national information network, to generate new energy sources and to create advanced recycling systems. It is unlikely that he will be able to move on all of these fronts at once, but his Administration will make the effort in many.

To finance the ambitious array of infrastructure projects, Clinton proposes to tap private and state and local pension funds. This would mean a diversion of investment capital from private business to government agencies.

Health care costs will continue to rise. Clinton wants to guarantee every American quality health care, including hospital and physician services, prescription drugs, prenatal care, mental health, mammograms and routine screening. He also advocates expanding Medicare to cover long-term care. All that is bound to be very expensive. Every employer is to be required either to buy private health insurance for its employees or to pay into a public fund created for the purpose. Every American not covered by an employer is to receive the core benefits package.

Education costs will increase more rapidly. Clinton’s plans to “overhaul” the public schools include establishing tough education standards, setting up a national examination system, reducing class sizes and providing money for school security and metal detectors. Clinton also wants to set up a national service trust fund to loan money to every American who wants to go to college. For those who do not go on to college, he intends to set up a youth opportunity corps and establish a national apprenticeship system. He promises each graduate “a good job”--that’s one of those campaign pledges that is likely to dissolve before Inauguration Day.

Social welfare outlays will also grow, at least initially. Clinton advocates fully funding Head Start, the infants’ and children’s program, and all of the initiatives proposed by the National Commission on Children. He also wants to give people on welfare education and child care--in an effort to eventually wean them off public support.

The government’s role in housing and urban development will increase. Clinton’ plans include government funding of low-income housing, the prevention of redlining and creating a network of community development banks. The latter sounds suspiciously like the original justification for the now-failed savings and loan associations.

The federal government will enter areas of activity traditionally left to state and local governments and to the private sector. For example, Clinton promises to create a national police corps. He also has pledged to put 100,000 new police officers on the street and to establish boot camps for first-time offenders. He wants to fund more drug treatment. The Clinton program also includes a new agency to develop “cutting-edge products.” Presumably, he means more than just lawn mowers.

The defense budget will be cut much more than now planned, but the federal government will be more heavily involved in the activities of defense companies. Clinton proposes loans and grants to help defense companies convert to civilian pursuits.

A Clinton Administration likely will also try to carry through on some of the President-elect’s many tax proposals. These range from lowering the burden on the middle class to making the rich pay their “fair share” of taxes, to providing a targeted investment tax credit. A targeted credit means that the federal government will choose the specific investment categories that qualify.

Clinton’s tax program includes a 50% tax exclusion for entrepreneurs, making the research and development tax credit permanent and expanding the earned income credit. Of all these proposals, increasing the tax burden on the high-saving, upper-bracket taxpayers is most likely--with negative consequences on private investment.

While Clinton tends to lean against protectionist sentiments, the balance of the new Congress is likely to be looking in the opposite direction. Thus, at the margin, we can expect more regulation of imports and foreign investment (including U.S. overseas investment) than under President Bush.

Several basic trends are close to certainty in the Clinton Administration: a far more activist federal government, much more government regulation, substantially higher business and upper-bracket taxation, and many more government spending programs--but far fewer than promised.

For the next four years, we can expect more economic decisions to be made in Washington and probably the adoption of a national industrial and planning policy--with a new label yet to be designed.

But perhaps the most important changes will be made in response to developments that are not now visible in anyone’s crystal ball.