Already, the First Big Test for Clinton

TRB

November 12, 1992|By TRB

WASHINGTON — Washington.--As many have noted, President-elect Clinton faces two contradictory economic challenges. One is goosing a sluggish economy in the short term. The other is the federal deficit, which is sapping our long-term economic strength. Any short-term stimulus -- a tax cut, a spending increase, or some combination -- will increase the deficit, thus worsening the long-term problem. Which should he choose?

To a back-seat driver, the answer is obvious. Going for the short-term stimulus would be a mistake that could wreck the Clinton presidency. I count five reasons.

First, it may not be necessary. Before the election, Mr. Clinton was pooh-poohing President Bush's claims that the economy is on the mend. Now he can afford to admit that Mr. Bush may well be right. Government stimulus efforts usually come too late in the business cycle to do much good.

Second, in the new global economy, an artificial short-term stimulus may be self-defeating. The markets will greet any such effort by raising long-term interest rates, due to fear of rising deficits and future inflation. This will counteract any stimulus effect. In the month before the election, long-term rates went up almost half a point on the mere supposition that Mr. Clinton would win and then attempt a quick economic jolt.

(The flip side of this is that markets will reward genuine commitment to deficit restraint with lower interest rates and renewed confidence in the American economy. That will have a stimulus effect of its own.)

Third, much of the present jobs agony is unrelated to the short-term state of the economy. Huge layoffs in corporate America are part of a historic restructuring that won't be derailed by a fiscal stimulus. Nor should it be derailed. Mr. Clinton's plans for worker retraining and building new industries are the right answers for this one.

Fourth, Presidents Reagan and Bush destroyed fiscal stimulus as a useful economic medicine, at least for now, by overprescribing it. If the economy is sluggish with a $300 billion-plus deficit (and low, low short-term interest rates to boot), what will it take to stir the juices? $400 billion? $500 billion?

Fifth and most important, there's politics. If Mr. Clinton uses this excuse to evade the deficit problem early on, he'll never address it. Fiscal stimulus is candy. Deficit reduction is spinach. At the beginning -- with good will from citizens and Congress, and re-election four years away -- President Clinton's power will be at its zenith. If he offers candy now, spinach won't sell later.

What the Clintonites would like to do, probably, is to offer a candy/spinach package deal: an agreement in advance that a year or two of stimulus would be followed by serious deficit reduction. This is a fantasy. It would be the fourth time in less than a decade that America would have made a solemn commitment to start serious deficit reduction in a couple of years.

Count 'em. In 1985 we had the Gramm-Rudman-Hollings law, ordering across-the-board spending cuts if deficit targets weren't met. When that became too onerous in the late 1980s, the targets were extended. In 1990, when the extended deadlines would have started to bite into popular programs, we had the Budget Summit. That agreement put off tough love until after the 1992 election. And here we are.

Arguments that Mr. Clinton should ignore the deficit at least in the short term are coming not just from Keynesian liberals urging a quick infusion of federal spending on things like infrastructure. Since the election there also has been a steady drumbeat of conservative commentary demanding that Mr. Clinton prove his bona fides as a ''new kind of Democrat'' by quickly enacting tax favors for business such as an investment tax credit or capital-gains tax cut.

Mr. Clinton got elected promising all these things in various forms, but he also promised to pay for them with compensating tax increases and/or spending cuts. Trouble is, any such ''revenue-neutral'' approach -- giving with one hand, taking away with the other -- would not provide a short-term jolt. And of course it would require selling the spinach along with the candy.

That's why the Clintonites are already traveling down the wearily familiar road of claiming that various goodies will ''pay for themselves,'' a la Ronald Reagan's famous supply-side tax cuts.

Remember the Laffer Curve? Well, please welcome the ''Aschauer Curve,'' another economist's bid for immortality. It purports to show that public infrastructure investment -- roads, bridges, etc. -- generates enough new economic activity to replace, in remarkably short order, the tax revenues it costs. And Clinton advisers reportedly are peddling a study by another economist making a similar claim for the proposed business investment tax credit.

It is hard to think of anything that would be more dispiriting than to see a President Clinton embrace the discredited politics of the free lunch. Mr. Clinton is stuck forever, no doubt, with the label ''slick.'' But there are different ways for a politician to display, and use, slickness. One is to give people everything they want. Another is to convince people to want what you give them. The second type of slickness is a valid part of leadership. Which kind of slick is our next president?

TRB is a column of The New Republic, written by Michael Kinsley.

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