Clinton's Attack on the Deficit

February 18, 1993

Tactically, Bill Clinton is Ronald Reagan in reverse. His decision to raise taxes right at the beginning of his tenure is the mirror image of Mr. Reagan's determination to lower them. It is a brave move, one that has Republicans chortling at the political unwisdom of a Democratic president dishing out pain instead of pleasure.

Yet, in our view, Mr. Clinton is on the right track. In his first year in office, when his power is at its zenith, he either has to fight the deficit monster created by 12 years of Reaganomics or remain its prisoner until he gives way to a successor. And while cuts in government spending deserve more emphasis than his fellow Democrats are inclined to give them, the restoration of the government's revenue base is the only credible avenue of attack.

In early assessments of the president's economic plan, we would advise readers to keep an eye above all else on the bond market, which thinks long term about the deficit and future growth potential. In the aftermath of Mr. Clinton's Oval Office speech previewing his address to Congress last night, interest rates on 30-year Treasury notes continued to decline to their lowest levels in years. That constitutes a vote of confidence in the new administration. While long-term interest rates of a shade over 7 percent are still way too high in a 3 percent inflation environment, it indicates that the financial markets are pleased that the new president wants to change the deficit trend lines from stratosphere to terra firma.

Much has been made of Wall Street's 82 point plunge in reaction to the Clinton Monday night speech. While the stock market has legitimate worries that too big a tax bite could short-circuit the recovery, the facts are that it leveled off yesterday and, at 3312 on the Dow, it is still two points higher than it was on Feb. 1.

As Mr. Reagan could attest, Mr. Clinton had better worry not so much about reaction in the country, where clamorous special interest groups will raise a cacophony of conflicting demands, but about Congress. On Capitol Hill, a dozen years ago, House Democrats were only too willing to cut top income tax rates from 50 percent to 27 percent but resisted Reagan calls for commensurate reductions in non-defense spending. Now they may go along with Clinton proposals to push rates back up to 36 percent (really 39.6 percent in top brackets) but watch for defections in party ranks when the president asks that the affluent elderly pay more taxes on their Social Security benefits or seeks to crimp Medicare, Medicaid and other domestic programs.

If the end result is just another "tax-and-spend" Democratic fiesta comparable to the "borrow-and-spend" orgy of the Reagan-Bush years, Bill Clinton will be a failed president. For that reason, we question the need for his $31 billion stimulus in the midst of a recovery. What is really required is a long period of "tax-and-austerity" from which the nation will emerge stronger and more prosperous, its future generations no longer loaded with debt.

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