NEWS ANALYSIS : Clinton Health, Trade Policies Could Collide

Bill Clinton won the White House by pledging to create jobs and foster economic growth.

Yet there has always been a conflict within Clinton’s agenda, one that has become more apparent during his fall policy offensive. It is a conflict that the President’s critics--most notably Ross Perot--are beginning to exploit.

On the one hand, Clinton hopes, through health care reform and other measures such as long-term unemployment benefits and job retraining, to develop a European-style social safety net financed by businesses and taxpayers.

On the other, he is an ardent supporter of free trade and endorses the North American Free Trade Agreement, which would further open the U.S. market to low-wage competition from Mexico.

The big question is whether both goals can be achieved at once and whether, taken together, they will hurt job growth.

Critics warn that Clinton has not given enough thought to the potential for job losses from the combination of NAFTA and health care reform. Such losses could be most pronounced among those workers whom candidate Clinton promised to help the most: the people at the very bottom of the wage and educational scales, who suffered the most during the 1980s.

Many of those workers are in unskilled factory jobs that are vulnerable to competition from cheap foreign labor; others work in service-sector businesses that may seek to cut their payrolls if the government, as Clinton has proposed, requires universal health insurance coverage.

The end result: Opportunities at the bottom of the U.S. economy may diminish.

“You could end up widening the income disparity in this country,” said Robert Dunn, an economist at George Washington University.

Michael J. Boskin, chief White House economist in the George Bush Administration, argued in a speech in Washington on Friday that Clinton has failed to answer the larger question of how he can continue to add new burdens on U.S. businesses at a time when Europe and other regions are going in the opposite direction, trimming many of their social programs in response to mounting budget deficits and intensifying global competition.

“If we want a recipe for unemployment levels of 10% and an economy that is too rigid to create jobs, then we should move to embrace the labor policies that the people in power are now endorsing,” Boskin said.

Administration officials, arguing that the Clinton agenda does work as a coherent package, insist that NAFTA and health care reform will not operate at cross-purposes.

While a new Administration study warns that health care reform could cost jobs, White House officials stress that the impact of both health care reform and NAFTA should be relatively modest when it comes to employment.

In addition, they note that the Mexican economy is only 4% as big as the U.S. economy and that even if U.S. labor costs rise slightly as a result of health care reform, Mexico is far too small to threaten U.S. dominance of a new North American trading bloc.

Indeed, U.S. labor is now among the most productive and cost-competitive in the industrialized world, which is one reason so many foreign firms are willing to open plants here.

Overall, Administration officials contend, health care reform and NAFTA will enable the U.S. economy to remain competitive and retain a productive work force.

Health care reform, according to this argument, will ease the burden of insurance costs for many large industrial firms that are important exporters. Those firms will in turn benefit from more trade through NAFTA, and the trade agreement will also be a boon to the high-skill, high-wage industries that compete with the Japanese and the Europeans.

“The overarching goal is a simple one,” chief White House economist Laura D’Andrea Tyson said. “It’s to strengthen the United States as a high-wage, high-skill, competitive economy.”

The Administration acknowledges that many small and medium-sized businesses stand to lose under Clinton’s health care reform plan--primarily service firms, such as retailers and restaurant chains, that do not now provide their employees with health insurance.

But small firms and their workers will receive government subsidies to help pay for health care, and those companies are not the ones most vulnerable to foreign rivals, so their higher health care costs should not reduce the nation’s competitiveness.

In addition, Labor Secretary Robert B. Reich argues that health care reform will make the nation’s work force more mobile and flexible because workers will no longer feel locked into dead-end jobs out of fear of losing health insurance coverage.

“This will end job-lock,” Reich said. “It will make our economy much more flexible. There are, for example, people who might want to leave a large company to start their own, but don’t because they are afraid of losing their insurance. Now they will go ahead and take the plunge.”

Reich adds that universal health care will also end “welfare-lock.” Welfare recipients will no longer turn down low-wage jobs for fear of losing health care coverage provided by Medicaid, he says.

Reich notes that other Clinton initiatives looming on the horizon, such as welfare reform and job-training/apprenticeship programs, will further increase the incentives for Americans to work and become productive--fitting into the policy matrix that Clinton is starting to construct.

The Administration and its supporters see this policy blitz as proof that the President is following through on his campaign vow to put America’s economic concerns above all else.

“So far, he has been trying to do everything that was in ‘Putting People First’ (Clinton’s campaign agenda) and more,” said Derek Shearer, an economic adviser to the Clinton campaign and a professor at Occidental College in Los Angeles.

Accurate or not, the Administration’s case is abstract and complex, and so it seems increasingly vulnerable to sound-bite attacks from political foes such as Perot.

In his struggle to defeat NAFTA, Perot often links the trade agreement to Clinton’s health care proposals, arguing that they will raise the costs of labor in the United States at the same time that NAFTA is offering U.S. firms an escape route to avoid those higher costs.

“If you are a businessman and your competitor goes to Mexico and then Clinton’s health care reform passes, you will either have to go to Mexico or go out of business,” Perot said in an interview. “Then you add in some of Clinton’s other plans like (prohibiting firms from hiring permanent replacement workers for strikers), and you will definitely go to Mexico. It’s just bizarre how they don’t think about the whole picture and how all these things fit together.”

The likely impact of Clinton’s policies on jobs and economic growth probably lies somewhere between the predictions of the Administration and its critics.

Above all, economists warn, it is extraordinarily difficult to predict exactly how many jobs will be won or lost as a result of health care reform or free trade with Mexico.

At least some of the broad economic effects seem evident. Almost all economists agree, for instance, that the United States will be much more competitive if it can curb health care costs. And for many large firms that now pay very high health insurance premium rates, the Clinton plan will reduce costs.

Clinton’s proposal to help pay for covering early retirees who are not yet eligible for Medicare will also lift an enormous burden from big industrial companies that have been downsizing to reduce costs.

It is no wonder that the Big Three auto companies, now burdened by aging work forces, love health care reform; it could cut their health care costs nearly in half.

Even for firms that do not now offer insurance, the costs of the Clinton health care plan would not be all that terrible: The mandated premium payments would be the equivalent of a 35-cents-an-hour pay raise for a minimum-wage worker earning $4.25 per hour today.

“The job impact from a raise that small would not be very significant,” said Karen Davis, a health care economist at the Commonwealth Fund in New York. Because U.S. workers are more productive, that rise would probably not be enough to persuade many U.S. firms to switch to cheaper Mexican labor.

But the real problem could come down the road if the long-term costs of health care reform worsen. Few analysts say they believe that Clinton has presented a realistic plan to finance national health care. Many say he will have to come back looking for bigger taxes.

Those taxes could eventually rise to the levels of European nations that already offer health care and other benefit programs.

One of the most likely places for Clinton to look for more money to cover health care will be the new “insurance premiums” that companies and their workers will pay to cover the costs of their health insurance.

Clinton’s plan requires companies to pay 7.9% of wages and workers another 1.9% for insurance purchased through large health care alliances.

But economists say they worry that once the premiums are in place, they could be easily ratcheted up to cover the costs of the entire national health care program. That would transform them from premiums into payroll taxes.

The first hint of that came earlier this month when Administration sources suggested that the employer premiums might actually start out higher than 7.9%.

“I see in Clinton’s plan a much higher tax burden down the road,” said Alain Enthoven, a health care expert at Stanford University. “I see in the premium payments the beginning of a higher payroll tax on all earned income, and that will push us away from rewarding work and toward increasing the rewards for not working.”

Much higher payroll taxes could eventually become burdensome enough to persuade U.S. firms to take advantage of free trade with Mexico. House Majority Leader Richard A. Gephardt (D-Mo.) has come out against NAFTA because of its lack of worker-protection provisions.

Leading international economists are already trying to steer Clinton clear of the idea of higher payroll taxes.

The Organization for Economic Cooperation and Development plans to issue a report next month warning the United States that its competitive position would be weakened by raising payroll taxes to pay for larger social programs.

The Paris-based OECD, a group of the largest industrialized nations, issued a similar report this summer, warning that European payroll taxes, which in some cases exceed 50% of wages, are making it difficult for European firms to confront international competition.

“The Europeans can’t afford the social safety net they have in place, yet in America people feel theirs is inadequate,” said Dennis Lamb, director of the OECD’s Washington office. “The problem is we can’t ignore the pressures of free trade, and that leaves us looking for better solutions.”

Health care reform is not likely to push U.S. taxes to European levels. The United States has the lowest level of government involvement in health care of any industrial nation--even Japan has national health insurance--and Clinton’s plan envisions that the private sector will continue to handle the bulk of health services.

“I look at what is going on in Europe and the United States as a kind of convergence,” said Fred Bergsten, founder of the Institute for International Economics in Washington and a frequent Administration adviser. “As the Europeans begin to bring down their social programs and costs, we will slowly rise and perhaps ultimately meet somewhere in the middle. But I don’t think we will be rising so dramatically that it will have a big impact on our competitiveness.”

In fact, Clinton has tried hard to sell his agenda by arguing that it really is an attempt to address both domestic and international concerns simultaneously: confronting change and trade pressures while providing greater security to the American people.

“In order for us all to have the courage to make these changes, we need a higher level of personal security in this country,” Clinton said Friday in a speech in New Jersey.

But if he is to win on all fronts, Clinton is going to have to make it crystal clear to voters and to Congress that he is not running in different directions at once.

“I think you have to fault the Administration for failing to make an adequate case for the linkages between these policies,” Bergsten said. “Clinton did a much better job during the campaign of drawing the linkages between his policies than he has been doing this year.”