NEWS ANALYSIS : Clinton Budget Plan Enters Final Battle

TIMES STAFF WRITER

President Clinton began the year with high hopes and an ambitious vision of fundamental economic change. Now, as the President's embattled economic plan lurches toward the congressional finish line, the hope and the vision have dimmed considerably.

In their place has come a scramble by the White House for some sort of credible victory in this month's climactic budget battle in Congress. Faced with a determined struggle among legislators, lobbyists and special interests for economic and political advantage, Clinton must place his faith in his party's congressional leaders.

Clinton maintained his distance during earlier stages of the battle, promising to make his stand during negotiations that begin this week between House and Senate conferees. Yet the White House recognizes that, for the next few weeks, House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) and Senate Finance Committee Chairman Daniel Patrick Moynihan (D-N.Y.) may have more say over the final shape of the plan than the President.

Four months of congressional ripping and shredding--often aided and abetted by a deal-making White House--already have taken their toll. "The President first was confrontational with the lobbyists, and then he was far too willing to compromise with them, and that approach has cost him," noted Washington political and social analyst Amitai Etzioni.

Indeed, of the President's original three-part economic agenda--gradual deficit reduction, short-term economic stimulus and long-term spending on public investments--little is left besides a grim obsession with cutting the deficit.

And in its zeal to balance Clinton's new taxes with an equal dose of spending cuts, Congress has transformed the composition of Clinton's package, eliminating or scaling back programs that would have provided an infusion of funds to address domestic issues that have been on the back burner for 12 years.

"This budget is the end product of a surprising number of political miscalculations by the White House, in which they have lost many of their budget battles, and so we have wound up with a much less growth-oriented package," observed Washington political analyst Kevin Phillips. "You've got a package with too many taxes and too much deficit reduction at a time when the economy is weakening and you've got more defense cutbacks coming. So this budget could take a weak economy and kick it down into the cellar."

To be sure, there is something in the budget for both Clinton and his critics. Conservatives and deficit hawks in both parties are arguing that the plan taking shape in Congress is actually better and politically more palatable to the nation's broad middle class than the one Clinton initially proposed.

Clinton, meanwhile, can still rightfully claim that Congress has stuck to his broad budget outlines, most notably the five-year, $500-billion deficit-reduction target. Clinton also can argue that his willingness to tackle the runaway federal deficit gives the United States new credibility as a leader in talks with Europe and Japan on global economic issues.

The Administration and its supporters are stressing that the bill containing the bulk of Clinton's economic program has only suffered superficial wounds. Leon E. Panetta, director of the White House Office of Management and Budget, even called a press briefing after the Senate voted on the package to release a detailed document pointing out similarities with the President's original bill.

"There never was a budget in the (Ronald) Reagan or (George) Bush years that moved more quickly or remained more intact than this budget," stressed Senate Majority Leader George J. Mitchell (D-Me.).

Yet while the main budget bill works its way through the congressional grinder, other Clinton economic initiatives are faring even worse.

The principal bill covers only about two-thirds of Clinton's overall budget. It contains all of his proposed changes involving taxes and entitlement programs like Medicare and Social Security but none of his proposals involving discretionary appropriations.

Many of Clinton's biggest domestic spending initiatives, including job training and a range of anti-poverty and children's programs, are moving through the House on a separate, slower legislative track. There, Clinton's new initiatives largely have been gutted by a cost-conscious Congress worried about any effort to expand spending.

Many of those changes have undermined Clinton's credibility as he tries to convince the public that his overall economic plan still makes sense. The President introduced his program with some clear ideas on how it would affect the economy, but it has been so transformed since February that even Administration officials no longer seem sure of its long-term impact.

Initially, Clinton said that the plan would redress the social and economic lapses of the Reagan-Bush era. It was intended to raise taxes on the rich and ease the burden on the poor, while reducing defense spending and shifting more government resources to productivity-enhancing investments such as public works and job training. All of that was to be accomplished within the context of long-term deficit reduction and was to set the stage for Clinton's mammoth health care reform program.

But the plan had contradictory objectives--expansionary economic stimulus along with contractional budget cutting--and Clinton had to rely on a complex and tightly structured mix of tax increases and cuts, spending increases and reductions to achieve his goals.

Ultimately, the program's competing themes were too subtle and its parts too interdependent to stand up to the brutal pounding of the political process. And, as elements were stripped away bit by bit and as Clinton agreed to one tax exemption after another to win crucial votes, the structure began to unravel. Before long, it became almost exclusively a deficit-reduction package, rather than an economic plan with broader objectives.

As a result, Clinton's campaign promise to introduce policies that would jump-start the economy and accelerate job creation have gone by the boards. Administration officials conceded that the only stimulative effect left in the plan will come, paradoxically, from deficit reduction: Lower levels of federal borrowing may bring down long-term interest rates, which remain abnormally high relative to short-term rates, despite recent declines. Low long-term rates would be a boon to the economy because they would be likely to encourage more business borrowing and home lending.

"The course of U.S. interest rates will have an enormous impact on the success or failure of the Clinton plan," noted Robert Hormats, an economist and vice chairman of Goldman Sachs International. "But my biggest worry is that we won't get much economic growth or job creation from any of this."

With the defeat of Clinton's stimulus plan by Senate Republicans and with few of his other new spending proposals left in the budget, White House economist Laura D'Andrea Tyson has reduced the Administration's forecast for economic growth in 1993 from 3.1% to less than 2.5%. Tyson conceded that uncertainty over how Clinton's budget will affect the country is partly responsible for a recent drop-off in consumer spending and business investment.

"We would expect weaker growth and investment, both public and private, if the budget comes out looking like the one we now have," Tyson noted.

Increasingly, Administration officials are acknowledging that Clinton has little room left to boost the economy in any more direct way. So, like Bush before him, Clinton finds himself increasingly a hostage to the business cycle, waiting for the economy to recover on its own.

Clinton originally developed an agenda that sought to deal with a broad range of political and economic trends. He hoped to reverse the economic policies set in motion by Reagan, to confront the mania for deficit reduction embodied by Texas billionaire Ross Perot and to re-energize the government's role as a positive force in the economic life of the nation.

But as the plan's final contours are emerging, it seems clear that Clinton is likely to achieve only mixed results in addressing each of these goals.

From 1977 to 1993, the effective federal tax burden on the wealthiest 1% of Americans fell from 36.4% to 28.5%, a decline that dwarfed the 1% reduction in the tax burden on the poorest 20% of Americans.

Clinton's tax bill was designed to raise taxes on the rich, and so far most of his proposals in this area have survived the congressional process. Both the Senate and the House have agreed to raise the top individual income tax rate from 31% to 36%, to impose a 10% surtax on those earning more than $250,000, and to toughen the alternative minimum tax. Taken together, the changes would raise the top rate on America's richest individuals to 39.6%. In a search for new sources of revenue, the Senate upped the ante by extending the 10% surcharge to capital gains, raising the top tax rate on profits from stocks and other investments from 28% to 30.8%.

The Joint Committee on Taxation noted that 72% of the plan's tax increases would hit people making more than $200,000 a year. For those earning more than $1 million, Clinton's bill would raise annual taxes by more than $75,000, according to the accounting firm of Deloitte & Touche.

Clinton has had less success in using his budget to reverse the downward spiral suffered by the poor in the 1980s or in developing his own pro-growth spending initiatives. Clinton's proposal to expand the earned income tax credit for the working poor was cut back by $10.2 billion by the Senate. His proposal to increase funding for the food stamp program by more than $7 billion was eliminated entirely. A $5-billion proposal to create 10 "empowerment zones" to give businesses incentives to hire inner-city workers passed the House but was eliminated in the Senate. The proposal is popular with the newly energized Congressional Black Caucus and could be one of the most difficult issues to resolve in the House-Senate negotiations. Another $1.4 billion to combat child abuse also was dropped in the Senate.

Meanwhile, in the appropriations bills now moving through Congress separately, Clinton's plan to expand funding for Head Start and a summer jobs program were virtually gutted. New funding for nutritional programs for low-income pregnant women and infants was sharply scaled back. An expansion in the low-income energy assistance program to offset higher energy or gasoline taxes also was dropped.

The bottom line: The Joint Committee on Taxation said that the plan would only provide a 2.1% reduction in the taxes paid by families earning $10,000 to $20,000 annually--and that doesn't take into account the effects on the poor of cutbacks in spending on programs that affect them.

"On balance, the way the budget emerged from the Senate, many of the poor would be worse off than they are under current law," observed Robert Greenstein, director of the Center for Budget and Policy Priorities in Washington.

House liberals already are warning they will not accept the Senate bill. Rep. John Conyers Jr. (D-Mich.), a key member of the black caucus, warned that the Senate version of the budget will be "dead on arrival" if it comes back to the House in its current form.

At the same time, the emerging budget would do little to curb the erosion of middle class living standards. Suburban economic anxieties powered the Democratic victory last year, but rising deficit forecasts have forced Clinton to renege on his promise of a middle class tax cut and instead to push for a broad-based energy tax that would hit middle class consumers. The Senate substituted a 4.3-cent gasoline tax increase for Clinton's energy tax proposal, but Clinton has said that he will fight for the energy tax in the conference.

Clinton wants the money from the energy tax to avoid making additional Medicare cuts approved by the Senate while still complying with the budget's deficit reduction targets. Overall, the Senate version of the bill probably would prove far more palatable to the middle class than Clinton's original plan. The Senate measure would impose tax hikes of $121 a year on those earning $40,000 to $50,000, according to the Joint Committee on Taxation. That compares with $211 under the House-passed measure, a figure similar to the original Administration proposal.

The pro-growth spending on Clinton's initiatives has been reduced to little more than a ghost of what was in his campaign platform, sacrificed to deficit reduction. The Administration's own score card shows that Congress has funded only about half of the initiatives in the President's original investment spending package. Administration officials have been able to do little more than prepare pilot programs and demonstration projects.

Clinton publicly remains committed to his initiatives, but Administration officials clearly understand that funding for them may never be appropriated.

Clinton and Congress clearly have gambled that deficit reduction is what the public wants most. The only disagreements between Republicans and Democrats on that issue are over the degree to which Clinton's program will bring genuine deficit reduction and whether it relies too heavily on taxes rather than spending cuts.

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