Clinton and the economy

Robert Kuttner

November 06, 1992|By Robert Kuttner

BILL Clinton will take office with high hopes and good will, but his presidency will stand or fall on whether he fixes the economy. His first task is to sort out the long-term "change" he champions from the short-term economic urgencies.

As John Maynard Keynes aptly observed, "In the long run we are all dead." It is the short run where people are losing jobs, homes and hopes. And Mr. Clinton will soon lose his political mandate if recovery is not forthcoming. Mr. Clinton courageously resisted the fashionable (and mistaken) view that deficit-reduction is economic priority one. He, and a growing consensus of economists, now recognize that the current enfeebled economy needs stimulus, not deflation.

But, with a $300 billion deficit, how to stimulate the economy without panicking the money markets and driving up interest rates? Here, Mr. Clinton needs a recovery plan based on investment rather than consumption; he needs the courage to damn the torpedoes, borrow to finance the investment, and then gradually to cut deficits once growth is rekindled.

Politically, this strategy demands a close alliance with the Federal Reserve Board, which has the power to make Mr. Clinton hero or a goat. The Fed under Alan Greenspan is almost pathologically fearful of inflation. Nonetheless, even this Fed recognizes that today's weak economy has virtually no inflationary pressures.

Mr. Clinton needs the Fed to keep lowering interest rates and to resist killing the recovery prematurely. He needs to repair the economy, not by reassuring Wall Street, but by showing the markets a convincing recovery program.

At the same time, slow growth reflects not just the current recession, but complex structural weaknesses. The latter won't be solved in the first hundred days, but the Clinton administration needs to begin repairing from day one. Monster issues include:

* Health care. The current system leaves 37 million Americans out, and tens of millions of others at risk of lost or denied coverage. It is the single worst source of both inflation and budgetary hemorrhage.

As my colleague Paul Starr points out in his book, "The Logic of Health Care Reform," there is a "negative consensus" that the system is broken -- but no positive consensus on how to fix it. A system that costs consumers $800 billion a year also represents $800 billion of income to people in powerful industries. It will take every ounce of President Clinton's prestige, wisdom and political skill to forge a positive consensus for health reform.

* Banking. We may soon see a "December surprise," when a new and misguided law takes effect, imposing rigid formulas on bank capital. The law -- Congress' overreaction to the banking scandals -- requires "undercapitalized" banks to reduce lending, and compels regulators to shoot the wounded. Mr. Clinton may face a short-term banking emergency even while he designs a long-term overhaul of the banking system to help productive industries find the capital they need.

* Education, training, wages. A core conviction of Clintonomics is that a global economy compels Americans to "work smart" or end up working cheap. This requires better schools -- something that Bill and Hillary Clinton deftly pursued in Arkansas -- as well as the integrated system of training, retraining and school-to-work transition that America has never had. It also requires fundamental work-and-welfare reform, based on the twin principles that citizens shall work and that work shall pay a living wage.

Monster issues like these are the substance of Mr. Clinton's promised "change." Each is intricate. Each will take time and skill to enact. Each poses a difficult politics, and each will not bear fruit overnight. But as Mr. Clinton pursues short-term recovery he must also address these long-deferred reforms, or the economy will perform below its potential into the next century.

Will Bill Clinton rise to these challenges? Is he astute enough to work both tracks at once? Will the money markets and the Fed let a progressive Democrat succeed? The precedents are mixed.

John Kennedy was able to deliver on his promise to "get the economy moving again." But the economy of 1961 did not have the accumulated damage to banking, nor the bloated health costs, nor the structural deficit, nor was American industry under global assault.

Jimmy Carter turned a turbulent economy over to the tender mercies of Paul Volcker, and was soon history. Franklin Roosevelt, who took office when the economy was in the worst shape of all, was handily re-elected three times.

Mr. Clinton seems to be a man of generous spirit and clear thought, as well as consummate political skill. He is a policy-nerd in the best sense: He takes the trouble to understand the issues. One can imagine Mr. Clinton not only meeting Alan Greenspan without cue cards, but also leaving the meeting with his clothes.

Mr. Clinton has a keen eye for very talented people. It is no accident that his remarkable personal network -- the "Friends of Bill" -- includes some of the best minds around. These will presumably staff his administration. At 46, the man also seems to have a real capacity for further growth.

He will need it. The repair of this economy requires all of Bill Clinton's strengths, and more.

Robert Kuttner writes a column on economic matters.

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