Clinton Fix-It Plan to Blend Giving, Taking
Last year, as Bill Clinton was still courting recession-weary voters in his quest for the White House, a funny thing happened to the U.S. economy: It started to perk up.
Consumers began to buy more, public confidence rallied and growth abruptly galloped forward at the fastest pace in four years.
Yet--in marked contrast to every other recovery since World War II--jobs have stayed scarce. Hard times retain a chokehold on Southern California and other regions. And the federal budget deficit threatens to balloon in coming years.
It is these crosswinds that will buffet President Clinton as he stands before Congress on Wednesday evening to unveil his fix-it plan for the economy, a package calling for long-term sacrifice to shrink the deficit while offering a short-term stimulus of new spending.
“Clinton has to make sure the economy keeps growing, and he’s got to cut the budget deficit,” cautioned Robert F. Wescott, an economist with the WEFA Group in Bala Cynwyd, Pa. “No one else could do it in the last 12 years. Can he?”
Attempting that, Clinton’s plan contains two seemingly contrary if coexisting parts, almost like Siamese twins that don’t like each other.
One key element is the stimulus, a plan to create jobs and spend even more federal money, albeit temporarily, to make sure that the national upturn doesn’t slip out the door as surprisingly as it slipped in. The other, seemingly contrary, theme is that America’s long-term economic well-being dictates tax increases and program cuts to combat the budget deficit.
The two approaches amount to “giving with one hand and taking away with the other,” observed Stephen S. Roach, a senior economist at the Morgan Stanley investment firm.
Also, the giving and taking are certain to create winners and losers, with uneven effects on regions, industries and classes of workers.
Equipment manufacturers are likely to gain from an investment tax credit that will prompt a wave of machinery orders, analysts say. New public works spending on the nation’s infrastructure could profit transportation and engineering firms.
Defense contractors will continue to bear the burden of cutbacks. Health care employment, which grew right through the depths of recession, could be hit by spending controls. Paper, aluminum and other energy-intensive industries may suffer from higher energy taxes.
Clinton, meanwhile, will try to put America back to work fast. The stimulus package, expected to be in the $30-billion range, will be divided between federal spending for public works jobs and new tax incentives for business investment.
Yet the spending pick-me-up may have more meaning as a symbol than as a cure: Even advocates agree that its size amounts to mere pocket change in the colossal $6-trillion U.S. economy.
Nor can the White House do much to counter the layoff craze in corporate America that has wiped out 330,000 jobs in management alone since the recession technically ended in 1991, according to the Merrill Lynch investment firm. Many experts say that the cuts ultimately will be good for the economy; that for all the anguish they are causing, a more productive, affluent nation will emerge in the end.
“The big picture is that it’s capitalism and that’s basically how it works,” said Wescott.
Besides attempting a short-term economic stimulus, Clinton will attempt to move the federal budget onto more stable footing for the long haul. That is the reason for tax increases and further spending cuts in defense and other programs.
Corporations and wealthy households are in line for higher taxes. Also, the middle class will be drawn in, most likely through some form of energy tax increase.
It all adds up to a “schizophrenic” strategy--to use Roach’s description--of trying to jog the economy and cut back spending at the same time. Yet it is a strategy rooted in today’s moody recovery.
Almost two years old now, the upturn has snubbed Southern California and parts of the Northeast altogether and been notoriously stingy with jobs. Nationally, the unemployment rate still hovers above 7%, and millions of Americans fear they will be next on the unemployment line.
If today’s upturn had performed with the vitality of its past counterparts, Americans would now enjoy 6 million more jobs, according to the Economic Policy Institute, a liberal think tank in Washington.
As a result, some analysts congratulate Clinton for pushing ahead with an economic stimulus. Only they fault him for not making it bigger. “The mantra of the campaign was good jobs, middle-class jobs,” said Robert Pollin, an economist at UC Riverside. “Since then, there really hasn’t been much attention to it at all.”
Defense cutbacks illustrate the cross-currents whipping against Clinton’s package. The President is under pressure to slice the defense budget further to find money to pay for his other plans. By some reports, Clinton will propose $6 billion more in cuts for 1994 than the George Bush Administration had planned, and the pace will accelerate after that.
The money will help the White House pay for new initiatives in public works and other areas. Nonetheless, these very cuts could magnify the distress of California and other areas already reeling from the defense build-down of recent years.
“If you want to generate savings in the short run, the only way you can do it is through cuts in personnel,” noted Mickey D. Levy, chief economist at CRT Government Securities in New York.
Others are dismayed by White House signals that the overall spending cuts will prove much smaller than tax increases, reversing the deficit-cutting priorities laid out by Budget Director Leon E. Panetta during his confirmation hearings.
Many economists view tax hikes as more harmful to the economy than benefit cuts--especially cuts for the affluent--because taxes draw money away from private spending and investment. Higher corporate taxes, for example, will raise revenue for the U.S. Treasury but may inhibit the creation of new jobs.
“My biggest disappointment is that they’ll finance the increased spending through higher taxes and higher debt,” said Levy.
To set the stage for greater austerity, Clinton has picked up Ross Perot’s motto of “shared sacrifice.” Proclaiming that Americans are best at “answering alarm bells in the night,” Clinton last week told business leaders that his economic plan will propose higher taxes for both businesses and wealthy individuals.
Nonetheless, the public remains deeply divided over the sorts of sacrifice that Clinton is requesting, according to a poll by Cambridge Reports, a Massachusetts research firm.
The January survey found strong support for at least some of the proposals. Solid majorities favored hiking income taxes and Social Security taxes for the wealthy.
However, the public split evenly on the question of raising corporate taxes, opposed raising gasoline taxes by 52% to 47% and overwhelmingly rejected having income taxes hiked across the board, by a majority of 69% to 28%.
“Judging by public opinion, the signs are alarming for Clinton and his message of sacrifice,” concluded Ted Byers, the firm’s executive vice president.
But personal sacrifice isn’t the only way to strengthen the economy for the long run, the White House believes. New incentives for business investment, to be included in Clinton’s package, are another way to shift the nation away from its 1980s-style consumer emphasis and toward a more investment-oriented climate.
The President may propose new incentives for people to invest in start-up enterprises, a key source of jobs in an era when corporate America is cutting back. Clinton also is expected to push for a tax credit on new investments in equipment and technology.
Proponents of the investment tax credit say it could spark jobs fast in factories that make new equipment and would pay off even further by enhancing the nation’s productivity. WEFA, for instance, calculated that an investment tax credit might produce 300,000 jobs a year, depending on its size.
Such details as whether the investment tax credit will be temporary, the amount of investments subject to the benefit and what types of spending qualify are not yet known.
In any case, the gains won’t be painless: Labor-saving technologies would surely cost many other people their jobs. “The investment tax credit encourages firing,” noted Allan Reynolds, a conservative economist at the Hudson Institute in Indianapolis.
Others, inclined to look more sympathetically on Clinton’s overall strategy, fear that whatever the final details of his plan, Congress may turn it into something unrecognizable--protecting all federal benefits while piling on unnecessary public works spending that could further strain the budget.
“The issue for the markets and the economy is what passes Congress,” said Richard B. Hoey, chief economist at the Dreyfus Corp. in New York. “What the President proposes is not necessarily what we are going to get.”
