Clinton’s Economic Ordeal: Promises Doomed by Math

As they shifted gears from running a presidential campaign to running the country in the early days of 1993, Bill Clinton and his senior economic advisers confronted two major challenges: crafting a coherent economic program that could get through Congress, yet keeping faith with the many promises Clinton had made during his frantic race for the White House.

There was just one big problem. The numbers in “Putting People First,” the celebrated Clinton campaign bible that helped power the Arkansas governor to the White House in 1992, simply didn’t compute. Living up to Clinton’s campaign promises would be like squaring a circle.

Almost all of Clinton’s senior aides had known that for months. The evidence that Clinton was promising more than he could deliver had become painfully clear to Clinton’s aides as early as May, 1992--even before the George Bush campaign revved up its full-throated attack accusing Clinton of basing his campaign agenda on faulty arithmetic.

“Putting People First” was not Clinton’s first attempt to craft an economic plan for his campaign. Early on, he and his advisers, especially campaign manager James Carville, had sensed the public’s hunger for substantive answers from the presidential candidates, especially on the domestic issues of the economy, jobs and health care that President Bush had largely ignored. So the first Clinton economic agenda was unveiled during the New Hampshire primary campaign, allowing him to claim he was the man with a plan.

The New Hampshire plan was fine, as far as it went. Developed largely by economic policy aide Rob Shapiro, it hit upon many of the major themes that would later dominate Clinton’s general election campaign.

But it was really just a manifesto, not a budget; it did little more than attach Clinton’s name to ideas that had been espoused for years by the Democratic Leadership Council, the centrist think tank Clinton had helped raise from the ashes of the party’s defeats in the 1980s. For example, it proposed two middle-class tax cuts: a 10% across-the-board reduction for the middle class and a dependent tax credit that would have saved average-income families $480 for each child.

But the New Hampshire plan didn’t make any attempt to balance the accounts.

In fact, it wasn’t until Clinton clinched the Democratic nomination that his aides first dared, even internally, to add up the costs of the promises he had made during the primaries. Shapiro ran the numbers in late May and for a brief time thought he had made the math work. But, to his horror, he found he had accidentally double-counted anticipated savings from military cuts proposed by the Bush Administration. The real numbers were frightening. Cumulatively, Clinton had promised tax cuts and new spending that would exceed by $100 billion the tax hikes and spending cuts that were supposed to offset their costs.

But with Clinton trailing in the polls in late May and early June and scrambling to avoid the humiliation of a third-place finish--behind both Bush and Ross Perot--the campaign staff was prepared to take risks. Prodded by both Carville and Clinton’s key political adviser, George Stephanopoulos, campaign advisers developed and published “Putting People First” in less than a month. That allowed Clinton to unveil an economic plan by the time Perot announced his candidacy in late June.

To be sure, “Putting People First” backed away from some of Clinton’s most ambitious promises during the primaries. Instead of two tax cuts for the middle class, Clinton would offer just one.

Yet some of the document’s budgetary assumptions were still highly suspect. It called for cutting the deficit in half in four years, but specified only one program for elimination: a subsidy paid to beekeepers that cost a mere $16 million a year. Clinton had refused to endorse further spending cuts proposed by his advisers because he didn’t have time to check them out with Democratic leaders from the affected states.

The plan also suggested that $45 billion could be raised over five years by enforcing existing tax laws on foreign corporations, even though no tax expert in the country believed that tougher enforcement could raise more than $4 billion. Above all, the plan relied on $91.7 billion from higher taxes on the rich, combined with rapid economic growth to satisfy Clinton’s promise to halve the deficit, finance a $60-billion tax cut and underwrite $220 billion in new “public investments.”

It was Clinton’s version of the Reagan-era “magic asterisk.” The deficit would shrink, the campaign said, because better times lay ahead.

The numbers problem grew worse as the campaign dragged on. In developing a platform, planners relied heavily on the official economic forecast issued by the Congressional Budget Office in January, 1992. But in August, just as the general election campaign was gearing up, a CBO revision rendered obsolete virtually all the campaign’s calculations. The projected deficit for fiscal 1996, for example, was raised to $254 billion from $178 billion; the estimated 1997 shortfall went to $290 billion from $226 billion.

Clinton’s promise to chop the deficit in half while cutting taxes for most Americans was no longer within even shouting distance of reality.

His campaign plan was consciously designed to be a mirror image of Reaganomics, a bold attempt to reverse 12 years of Republican policies. But, like the Reaganauts before them, Clinton and his team were so anxious to start a revolution that they chose to overlook the harsh truths of federal budgeting. It was as if Clinton’s campaign advisers were the descendants of David Stockman, the budget director who acknowledged only in hindsight that Reaganomics was a sham.

Still, the Clinton campaign was silent about the CBO revisions until after the election. Luckily for Clinton, the media largely ignored the changes too, and the Republicans weren’t about to make a big issue of the fact that the deficit was getting worse on Bush’s watch.

That enabled Clinton--now President-elect--to profess to reporters in December, 1992, that he was stunned by the new deficit projections emanating from the Bush Administration. In a Wall Street Journal interview, he said the deficit appeared much worse than it had when he assembled his economic plan earlier in the year. In background interviews, aides expressed outrage that Bush’s budget director, Richard Darman, had used his power to keep the widening deficit figures secret until after the election.

If Clinton was surprised by the new numbers, it was only because he was emerging from the cocoon of the campaign and finally focusing on what his most senior aides already knew--not because he was confronted with genuinely new information. The fact was, Darman’s new deficit projections were strikingly similar to the CBO’s August estimates.

Still, many in the Clinton Administration point to their April, 1993, re-estimate of Darman’s work--which predicted that the deficit for 1997 was on course to hit $346.3 billion unless Clinton’s economic plan was approved by Congress--to prove that Darman had been misleading them all along.

But the Administration’s forecast--clearly designed to make the final Bush-Darman report look as bad as possible--was at least as disingenuous as any budget ploy Darman had pulled.

For his final deficit forecast, Darman assumed that limits on “discretionary” spending (the budget for the Pentagon and most civilian government operations, but excluding entitlement programs such as Medicare and Social Security) would continue through fiscal 1998. Under the 1990 budget agreement, discretionary spending was capped until 1995, but Darman calculated that Congress would extend the limits and freeze discretionary spending. His final budget kept total discretionary spending frozen at $539.1 billion from 1995 through 1998.

Clinton’s budget director, former Rep. Leon E. Panetta of California, said there was no basis for Darman’s assumption. In his new budget, Panetta simply forecast that the cap on discretionary spending would be lifted after 1995. When the Administration unveiled the outlines of its economic plan in February, the deficit forecast reached that $346.3-billion range.

No one in the Administration really expected Congress to allow unfettered discretionary spending. Indeed, within weeks of the release of Panetta’s new numbers, Congress vindicated Darman’s assumptions. In the budget resolution that would provide the framework for the Clinton economic plan, Congress and the Administration agreed not only to extend the legal spending caps beyond 1995, but to impose just the sort of freeze Darman had used in his estimates. Discretionary spending would be held at $547 billion after 1995, just $8 billion more than Darman’s last projections.

Were Clinton and his advisers less than forthcoming when they blamed Bush and Darman for their woes? Ask Administration officials today and many will insist there was genuine surprise. Others smile and philosophize, not for attribution, about the nature of campaign rhetoric and the difficulty of defining truth within a political context.

Still, some senior advisers, including Treasury Secretary Lloyd Bentsen and Panetta, readily concede they were not surprised at all by the deficit forecasts. Neither were key members of the Clinton campaign staff. Economic policy director Gene Sperling, Shapiro and others discussed the CBO revisions soon after they were released in August.

“There was no surprise,” one adviser said. “You just can’t stop a campaign and suddenly revise your platform. Bush didn’t do it; Perot didn’t do it. And what would Bush have said if we suddenly had said, ‘Wait a minute, we need to update “Putting People First? “ ‘ He would have said, ‘Look, I told you their numbers were wrong, and now they are admitting it.’ ”

Yet behind closed doors, the campaign staff was, in fact, updating the fiscal projections; a pre-transition team headed by Ira Magaziner began the work in August, 1992. “We knew the deficit was getting worse, and we expected Darman to try to show some surprises in the deficit, and we tried to take those into account,” said one participant. Clinton knew about the work, but in the rush to the Nov. 3 election, he apparently never received a full briefing on the effort.

It wasn’t until the transition that the timing appeared right to remake the Clinton economic program into one better showing the new President’s willingness to give deficit reduction a much higher priority than anyone outside his inner circle could have imagined.

Through most of 1992, Clinton privately had hated his campaign proposal of a broad-based, middle-class tax cut. He was sure it had cost him the New Hampshire primary, where rival Paul Tsongas had labeled him “pander bear” for offering sugarcoated economic prescriptions that ignored the deficit. Clinton’s liberal advisers--notably Robert Reich, now labor secretary--also disliked the tax cut, believing it would soak up scarce resources that could better be spent on domestic programs.

What the liberals didn’t foresee was the about-face of the post-election transition. In place of a tax cut would come a proposal for a $71.5-billion energy tax that would land squarely on the middle class.

Yet the success of Clinton and his key advisers at transforming his agenda into one that emphasized deficit reduction quickly got out of control, as Congress pushed the new President further than he had ever wanted.

When Clinton spoke of the need to bear pain and sacrifice to cut the deficit, miffed moderates and conservatives in Congress noted that the first major piece of legislation he had sent was a short-term stimulus plan larded with government pork. And, while his subsequent deficit-reduction package included plenty of real tax increases, it was noticeably light on genuine spending cuts.

For all his tough-sounding rhetoric, Clinton was facing hard choices. That became clear when his first formal budget proposal, issued in April, did not comply with Congress’ five-year spending caps--restrictions Clinton had promised to meet just two months earlier. What’s more, Clinton’s program barely addressed the surging expense of entitlement programs, the real culprits behind the deficits of recent years.

Critics began to observe that the Administration’s deficit-reduction plan looked a lot like the infamous 1990 budget agreement, which failed to control the deficit because it ignored spiraling entitlement spending. Another failure by Washington to curb the deficit--this time on the Democrats’ watch--could kill the party’s credibility on economic policy and unhinge the bond markets, where Clinton was counting on support for his plan to produce lower interest rates.

So Congress won drastic changes in the Clinton plan. His energy tax was abandoned in favor of a more modest gasoline tax and deeper cuts in Medicare and other entitlement programs. Federal spending would fall sharply, despite the potential risks to the nation’s economy.

Fortunately, in the second half of 1993, things clearly broke Clinton’s way. Interest rates fell and the economic recovery finally gained traction. The creation of new jobs was running at double the monthly pace in the last year of the Bush Administration. Both the CBO and the White House issued more upbeat deficit forecasts in early 1994.

But in February, 1994, as the economy seemed solid and Bill Clinton finally felt he could focus on health care and welfare reforms, the Federal Reserve Board yanked him back to earth by raising interest rates for the first time in five years.

For an American President, Clinton was learning, the economy is one headache that never seems to go away.