Clinton Economic Plan Stakes Claim on Center

President Clinton, expanding his claim to America’s political center, spelled out a new economic philosophy “for the 21st century” on Monday that calls for the government to take action on economic problems only when the private sector is unable to do the job.

In what aides described as a middle path “between the New Deal and Reaganomics,” Clinton and his advisors rejected the extremes: the conservative argument that the government has no role in the economy and the liberal position that the private sector cannot be trusted.

Instead, in the president’s annual economic report, Clinton and his economic team said that the government should leave the creation of jobs, wealth and rising living standards to the private sector, stepping in only where it seems likely that the market will fail.

The 424-page document, which began with a brief introduction by Clinton, asserted that the president’s centrist economic policy would provide a “legacy” for future generations that would “perhaps be viewed as this administration’s most enduring contribution.”

The thrust of the “new philosophy” was not radical in itself. “The government can sometimes make markets work better, but it is seldom in a position to replace them,” the report said. “Government has its strengths and limitations. We need to understand those limitations.”

Even so, by traditional standards, the document marked a major departure from the Democratic mantra of the 1970s. It said that the test of whether government should act should not be whether the stakes are important but whether it seems likely that the markets will not perform well.

The Council of Economic Advisors, which prepared the report, sought to couch the “new philosophy” as a framework for the policy prescriptions that Clinton outlined in his State of the Union address last week--reducing the budget deficit, spending more on education and spurring more jobs for welfare recipients.

The report said that the government “should focus its attention on those areas in which markets will not perform adequately on their own, in which individual responsibility is insufficient to produce desirable results”--such as aiding the unemployed and helping disadvantaged children.

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It also proposed a new rationale for Democratic support for free trade: The real objective should not be to reduce trade deficits, it said, but to ensure opportunities overseas for industries in which Americans are more productive than their competitors.

“Defenders of free trade can do it a disservice by promoting it as a way to create more jobs or to reduce bilateral trade deficits,” the document said. “In a full-employment economy, trade has more impact on the distribution of jobs than on the quantity of jobs.”

A major portion of the document was devoted to touting the administration’s economic record. Clinton noted that, over the last four years, unemployment has come down by almost one-third, while inflation is at a 30-year low. He credited his policies for both--news to most economists, who attribute such successes primarily to the monetary policies of the Federal Reserve.

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The report also contained essays that made these arguments:

* The administration disagrees with Federal Reserve Chairman Alan Greenspan that rising labor costs may soon exacerbate inflation. The report said that, because fringe benefits have been rising relatively slowly, “labor costs are not putting any upward pressure on prices.”

* Critics’ claims that there has been a fundamental shift in the labor market over the last few years--leading to low-paying jobs, with wage levels declining and layoffs increasing despite the rapid growth in the economy--are significantly “exaggerated.”

Actually, the report contended, almost 70% of the job growth in the United States over the last four years has been in higher-paying job categories. Overall wage levels have begun rising more rapidly than inflation, it said, and layoffs have started to decline somewhat.

* The growing inequality between the rich and the poor in America finally may be stabilizing again. Although it still is too soon to make a definitive assessment, the report said, statistics show that since 1993 the widening has slowed and may be narrowing.

Moreover, the report asserted, even the worst-case scenario does not necessarily mean that the poor are worse off than they were. Much of the widening in the gap has occurred because the rich have gotten richer, while those at the bottom have been holding their own, it said.

* The minimum unemployment rate that the U.S. economy can accommodate without setting off a new round of inflation has come down from the 6% level at which economists pegged it in the early 1990s, but the administration is not sure precisely where it ought to be right now.

* The administration agrees with the conclusion of an independent committee that the consumer price index compiled by the Labor Department each month overstates the actual rate of inflation, but it is reluctant to rush into what may prove to be “an easy fix.”

Instead, the report suggested issuing two indexes, at least for the time being: the current monthly statistics, which would be used to track inflation in the economy, and a delayed, more comprehensive index that would be used to adjust Social Security benefits and tax brackets.

The report also predicted that, with no major imbalances to overcome, the economy would remain strong in 1997 and beyond, with overall output growing at a 2% annual rate this year, the unemployment rate remaining about 5.3% and inflation in the 2.6% range.