Clinton's critical dilemma

Robert Kuttner

December 30, 1992|By Robert Kuttner

EVEN before he takes office, Bill Clinton and his advisers ar locked in a critical debate about the core premise and direction of his economic program. The issue is whether the federal budget deficit is even worse than anticipated -- and what to do about it.

Those who followed the Little Rock economic summit got a taste of what is being argued even more fiercely behind closed doors. One camp, represented at the summit by former Ross Perot adviser John White, emphasizes that budget projections now show the deficits for 1994, 1995, 1996 and 1997 at about $50 billion a year worse than those estimated a year ago when Mr. Clinton was writing his economic blueprint.

That $50 billion happens to be roughly what Mr. Clinton hopes to spend annually on additional infrastructure, to stimulate and rebuild the economy. The deficit-hawks are seizing on the worsened budget picture to press the president-elect to scrap or reduce the proposed public investment.

Mr. Clinton faces a truly momentous decision. Does he attempt to increase the economy's rate of growth in 1993 and 1994, even at the cost of higher deficit spending? Or does he aim to cut the deficit, even at the cost of slower growth?

To consider that question, take a closer look at why the deficit is projected to rise after 1993. In fact, the supposed worsening of the deficit is highly misleading.

For one thing, most of the projected deficit increase after 1993 reflects one factor -- the delayed timing of the savings and loan and bank bailouts. More of those outlays show up in 1994 and 1995, rather than 1992 and 1993, because the government has been slow to pump out the money, not because of any change in the economy.

Second, federal health costs are rising at higher than projected levels. The Congressional Budget Office (CBO) says that if the health system is left unreformed, Medicaid and Medicare will grow from their current 3.4 percent of gross domestic product to 6.1 percent of GDP in 10 years. That, all by itself, could wipe out all other deficit reduction measures.

These increased federal health costs, of course, are not the result of the federal government suddenly offering more generous health benefits. They reflect, rather, a recession that has dumped more people onto Medicaid, and the nation's failure to have a coherent health system.

The final reason for the higher projected deficits is slow growth itself. Although the recession is officially over, the growth rates in 1992 and 1993 will be the slowest of any post-recession recovery in the past half-century -- unless Mr. Clinton does something to dramatically boost growth. The Congressional Budget Office forecasts annual growth of well below 3 percent for most of the 1990s.

With a slow-growth, high-unemployment economy, the government takes in less revenue, and pays out more in food stamps, unemployment compensation, welfare, and other costs of supporting the economy's casualties. If growth stays this slow, you can't reduce the deficit enough simply by cutting program outlays or raising taxes; that only digs the economy into a deeper hole.

Moreover, the ingredients of the deficit suggest why it is not as "stimulative" as a deficit of this magnitude should be. As many economists have pointed out, the bank bailout replenishes money that exists only as entries in bank accounts. Any stimulative effect occurred years ago, when the money was actually spent.

(Suppose, for example, that your savings account was spent by a foolish banker to finance a bad investment. The FDIC comes along and replenishes your money. You are no more likely to rush out and spend that money than you would have been, had the banker never made the misjudgment. The money stays in your account, where you assumed it was all along. Hence, no economic stimulus.)

According to the CBO, the bottom line is this: Leaving aside the postponement of the banking and S&L bailouts, the real deterioration in the deficit in the year since Mr. Clinton proposed his recovery program is relatively trivial: $13 billion more in 1993, $15 billion in 1995 and $17 billion in 1995. And virtually all of this reflects either escalating health care costs, or slow growth itself. Another slight worsening is expected when the CBO issues its new estimates in January -- but this also reflects mainly slow growth and health care inflation.

The implications of all this should be clear: If Bill Clinton hopes to rescue both the budget and the economy, he needs to get the growth rate up and health care costs down, not to kill his public investment plans.

Higher growth, in the short run, demands more public investment. In the long run it requires a more efficient banking system, more productive companies and workers and more private investment. Health reform means a more comprehensive, efficient and ultimately less costly medical system. But health reform will not produce net budgetary savings until 1995 or 1996.

The paradox is this: You don't get deficit reduction by targeting deficit reduction. You achieve it -- over time -- by raising the rate of growth and by fixing the health system. Instead of obsessing on the deficit, Mr. Clinton's advisers should be debating how best to achieve those twin goals.

Robert Kuttner writes regularly on economic matters.

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