It's still the economy

Robert Kuttner

February 15, 1993|By Robert Kuttner

A SENIOR official of the centrist Democratic Leadership Council recently lamented to me, "We thought we were voting for Bill Clinton, but we got a combination of Paul Tsongas and Ross Perot." By this, my commentator meant that Mr. Clinton, the supposed economic populist, was turning out to be a social liberal -- championing affirmative action, abortion rights, gay rights, environmentalism -- and that he might turn out to be a deficit-hawk, too.

Mr. Clinton's social liberalism is fine with me, and it will even be fine with the voters -- as long as he gets the economy right. But will he? Or will he also emulate Ross Perot, and put deficit reduction and sacrifice ahead of economic growth?

Here are some key details in his economic address Wednesday:

* Growth or austerity? In the campaign, the president went out of his way to make growth the key issue. He let Paul Tsongas and Ross Perot advocate deficit reduction.

In his recent televised town meeting, however, Mr. Clinton said that the deficit was bigger than he had anticipated. He suggested that he would be calling on the American people to make sacrifices, and he refused to rule out a middle-class tax increase.

In fact, the deficit for 1997 is now estimated at $319 billion, rather than the $290 billion Mr. Clinton had assumed. That increase is barely statistically significant in an economy projected at more than $7.6 trillion. It results mostly from a delay in the savings and loan bailout, and increasing Medicare and Medicaid costs. The macroeconomic picture has not really changed. If the president is turning into a deficit hawk, it is bad news for those who elected him and bad news for the economy.

Before the deficit numbers had worsened, Mr. Clinton's pledge to cut the deficit in half by 1997 translated to a cut of $145 billion. That's plenty of cutting. If Mr. Clinton goes for more, he's imposing needless sacrifice.

Likewise, Mr. Clinton promised economic stimulus this year and next, in the form of increased public investment. The economy needs it, both to repair decaying infrastructure and to promote growth generally. The current recovery is too feeble to reduce the unemployment rate very much. If Mr. Clinton sacrifices public works to the gods of deficit reduction, it is another bad sign that he is going the way of Ross Perot.

* Middle-class tax hike. In the campaign, Mr. Clinton promised a middle-class tax cut. Now there is talk of raising taxes on the middle class.

This would be unnecessary fiscally, as well as poisonous politically. If Mr. Clinton doesn't overdo deficit reduction, he can make a big dent in the deficit by raising taxes on incomes over $200,000, adding a new top bracket on incomes over $1 million, and accelerating projected cuts in military spending. Together, that would yield nearly half the deficit reduction he has promised.

He can get additional revenue by raising the top corporate rate from 34 or 36 percent, and closing a variety of tax loopholes. If Social Security is to be a source of revenue at all, it is preferable to tax Social Security income received by the affluent elderly rather than imposing a one-year freeze on the annual cost-of-living increase. The remainder of deficit-reduction can come from higher economic growth, and from health reform.

Any across-the-board tax increases, such as higher taxes on alcohol, tobacco, or on payrolls, should be reserved for special purposes, such as universal health insurance or public works. These special uses of new revenues would be supported by voters. Raising taxes on the middle class for deficit reduction would be a political and economic loser.

* Health reform. This is the real key to budget stabilization, as well as a critical issue in its own right.

Recent press leaks from administration and congressional sources have suggested that Mr. Clinton may delay universal health reform, and look to further cuts in Medicaid and Medicare to reduce federal spending in the short run. That would be a disastrous course.

At present, Medicare pays hospitals only about 91 cents for every dollar of their actual costs, and Medicaid pays less than 70 percent. Cutting Medicare and Medicaid further would only shift these costs onto employers and consumers, force hospitals to raise their rates, and continue the general rise in medical inflation.

The real solution to the health crisis -- both the budgetary crisis and the crisis of evaporating coverage -- is universal health reform. Hillary Clinton's task force won't tender its complete blueprint until May, but the task force has been laboring night and day to give the president a rough outline for inclusion in his economic address.

If the administration is moving toward early and comprehensive reform, that's a good sign. If it is deferring reform and looking to chisel away at Medicaid and Medicare, that's another sign of indecision.

President Clinton's distressing stumbles during his first three weeks in office will either be remembered as early signals of a failed administration. Or they will fade into history as he comes to grips with his biggest challenge -- the economy. The stakes could not be higher.

Robert Kuttner writes a column on economic matters.

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