Clinton’s Deficit Focus Perils Investment Plans : Economy: He was unable to sell public or Congress on spending initiatives. It may be tougher still in future.

In the economic framework of the final budget plan, has President Clinton built a foundation--or a prison? Like Ronald Reagan, Clinton has now largely staked his presidency on an economic theory. Unlike Reagan, who ran and governed on a plan to cut taxes and limit government, Clinton has hitched his fate to a theory quite distinct from the one on which he won office.

In fact as a candidate, Clinton explicitly rejected the economic argument at the core of the plan: that reducing the deficit and lowering interest rates, by themselves, would revive the economy enough to boost living standards and accelerate job growth.

But with polls showing the public dubious about new spending, Clinton was unable to sell Congress or the country on his campaign agenda: a plan to couple deficit reduction with a dramatic increase in “public investment” in education, job training, research and public works necessary to make long-term repairs to the economy.

In his budget, Clinton proposed substantially less public investment than he promised during the campaign. In the bill passed by the Senate Friday night, there were still more restraints, with only 55% to 60% of the amount Clinton requested surviving, according to an Office of Management and Budget tally.

“If there is any net increase in public investment from 1993 to 1994, which I doubt, it will be smaller than any of the increases in the (George) Bush years,” said Jeff Faux, president of the Economic Policy Institute, a liberal think tank.

As a result, Clinton is left with a package that reads less like his own investment-oriented platform than the deficit-first plans advanced by former Massachusetts Sen. Paul E. Tsongas and Texas billionaire Ross Perot during the 1992 presidential election campaign. For some early supporters, that tempers the triumph in this week’s excruciating votes.

“If he does not get an investment program in place, he does not address the structural problems of the economy,” said Robert J. Shapiro, a vice president at the Progressive Policy Institute and a campaign adviser to Clinton.

Administration officials are now cautiously optimistic that they can revive Clinton’s public investment agenda in coming years. “I hope we can build on this foundation,” said Labor Secretary Robert B. Reich. “One point of view is to take the worst medicine first and then, as the economy (recovers) . . . we begin to focus on investment again.”

But the very manner in which Clinton waged the budget battle will make it more difficult for him to resuscitate his campaign investment agenda, Faux and others fear.

Under rules of the budget plan, all discretionary spending is frozen for the next five years. This means that Clinton can fund new initiatives only by proposing greater cuts in existing programs than he was willing to risk this year.

OMB officials recently calculated that, without additional cuts beyond those Clinton has already proposed, only about 60% of his investment spending goals will fit under the spending caps over the next four years.

Looking at that math, OMB Director Leon E. Panetta already has asked agencies to prepare 10% across-the-board cuts in next year’s budgets to make room for more investment spending. Some Administration advocates of the investment strategy are also pushing substantial further reductions in defense spending and intelligence, as well as in some high-profile domestic programs, such as agriculture.

But it remains to be seen whether Clinton will take the high-risk course of challenging existing programs with entrenched constituencies to clear the way for new initiatives. “He splits the difference and he doesn’t cross existing interest groups on the Democratic left,” said conservative economic consultant Jeffrey D. Bell. “As a result, there will be only incremental changes.”

Moreover, given the climate in Congress and the country, it may be more likely that any future spending cuts--like those Clinton has promised to propose this fall--will be applied to further deficit reduction, rather than new investment spending.

By Faux’s analysis, Clinton has compounded that problem by establishing reductions in the federal deficit and interest rates as the principal measure of his success. That yardstick, Faux argued, will make it difficult to justify any future policies that attempt to stimulate public and private investment at the price of a short-term deficit increase--though Clinton advocated precisely that policy in his Administration’s first months.

“I think he’s built himself a bit of a prison,” Faux said ruefully.

How far Clinton’s new line of argument departs from his original economic vision is evident in his prickly resistance during the campaign to assertions from Tsongas and Perot that the next President had to place top priority on deficit reduction.

In a speech last June to the National Conference of Mayors, Clinton noted that some people had asked him why he did not take all the money he intended to spend on public investment and devote it to deficit reduction.

“I’ll tell you why,” Clinton said, “because we have two deficits, a budget deficit and an investment deficit. And we cannot grow this economy until we put people back to work and until we invest in those things that will give us a high-wage, high-growth future.”

In the general election, Clinton specifically argued that attempting to reduce the deficit without simultaneously increasing investment would be self-defeating because it might contract the economy and actually reduce federal revenue.

Underlying Clinton’s original economic agenda was a political as well as an economic rationale. To Clinton and many of his advisers, one key toward building a consensus for activist government was reversing the perception among middle-class voters that Washington offered most Americans nothing but higher taxes.

Clinton hoped to accomplish that largely with proposals designed to benefit the middle class as much as the needy, including a tax break for families with children and a broad national service program to help young people pay for college.

But the priority on deficit reduction forced Clinton to abandon the tax cut and circumscribe his other ideas. The final version of the national service plan, for example, would allow only about 20,000 young people to participate initially. “What the hell is it we say has been delivered by this economic plan?” asked Richard B. Maullin, a Los Angeles-based Democratic pollster.

For one thing, lower interest rates, said one ranking White House aide. Beyond that, he added: “You can’t buy into the old logic that the only way you can affect people’s lives is by spending money. It’s not as if you need a lot of money to put cops on the street. Even a tax credit for families with children wouldn’t be that expensive.”

But those ideas do cost something. And even beyond the broad public investment agenda, other Clinton priorities, like health care and welfare reform, require substantial sums. After the last few months, it may not be possible with cattle prods to persuade a majority of Democrats in both houses to vote for a health care plan that requires a major tax increase.

If he is to overcome that reluctance--or energize the now sputtering investment agenda--Clinton faces the same task that confronted him when he took office: convincing the public, and with them Congress, that government can play a positive role in confronting economic and social problems. To carry out his own theory, Clinton still must dislodge Reagan’s.