Playing the hand he was dealt

Robert Kuttner

February 19, 1993|By Robert Kuttner

AT one point in his Wednesday economic address, President Clinton referred to the importance of playing the hand he had been dealt. The metaphor is apt, and the hand is a very tricky one to play. While Mr. Clinton's opening gambit was deft, he will need persistence, unerring good judgment and a large dose of good luck to succeed.

Consider first the deficit. Mr. Clinton's challenge was to produce enough deficit-reduction to reassure the Federal Reserve and the money markets that the deficit is truly on a downward course -- but not so abruptly as to deflate demand and abort the recovery.

On this count, his plan is just about right -- a modest stimulus now, then gradual reduction to bring the deficit below $200 billion by 1997, and very gradually reduce the national debt as a fraction of gross domestic product.

The deficit-reduction plan includes a defensible mix of spending cuts and tax increases. The particular tax increases President Clinton proposed are politically and economically sound, and for a change the budget arithmetic is real.

In order to make the numbers work, Mr. Clinton had to change his definition of "the rich" to families making over $180,000. This is not exactly independently wealthy, but by most people's reckoning it is pretty affluent. He also had to hit the middle class with modest tax increases, but he chose energy taxes that make policy sense for environmental as well as fiscal reasons, as well as a progressive way of hiking taxes on Social Security income for the upper 20 percent of pensioners.

So far, so good.

Mr. Clinton's problem, however, is that the hand he has been dealt leaves him almost no margin for error. To begin with, everything has to work just right, or he may find himself with a recession going into the 1994 mid-term elections.

For the moment, the Federal Reserve and the bond market seem to like the program, though the stock market isn't so sure. Long-term interest rates have been easing, to levels that have not been seen since before the first OPEC oil shock 20 years ago.

As Mr. Clinton noted in his speech, if slightly higher energy taxes are the price we pay for lower interest rates on home mortgages, consumer and business loans, the bargain is a good one. But it remains to be seen whether the money markets will keep supplying cheap credit if the economy begins recovering and demand for capital tightens.

There is no excuse for the Fed failing to cooperate. Inflationary pressures have never been lower in two decades -- that is the trump in Mr. Clinton's hand. Energy prices, raw material prices and labor costs all have been falling. The real estate market has been fairly flat, and despite the large deficit there is no evidence of "crowding out" of private credit demands by federal borrowing demands.

President Clinton signaled the special role of the Federal Reserve by seating Fed Chairman Alan Greenspan beside the first lady. The deficit reduction program should satisfy Chairman Greenspan, but whether the Fed will continue easing rates if a recovery ignites remains to be seen.

The broader problem, however, is that even a cooperative Fed may not be quite sufficient, for the economy's weakness cannot be corrected solely by gaining control of the deficit and lowering interest rates.

As President Clinton knows so well, America's problems of competitiveness and productivity go far beyond the federal budget. The president's address emphasized a variety of necessary "structural" reforms -- in banking, education and training, the sharing of advanced technology, and above all health care reform.

All of these are overdue, and Mr. Clinton deserves credit for stressing them. But all will take time to bear fruit.

A child newly qualified to begin Head Start next year will not enter the job market until the year 2010. Even with new apprenticeship and "lifetime-learning" programs, improving the quality of the work force is a slow, painstaking process.

Disappointingly, health care reform, which will be the subject of a separate presidential address later this spring, will not be phased in until 1996 or 1997, according to broad hints from the White House. In the meantime, Mr. Clinton will rely on "stopgap" -- his word -- limits on payments to doctors and hospitals. While some structural reforms will necessarily take time, health care reform could and should be implemented as quickly as possible.

Moreover, the economy's problems do not stop at the water's edge. With Japan, Europe, the former Soviet empire and much of the Third World all mired in slow growth, there is a scarcity of expanding markets for American exports. President Clinton devoted barely two sentences to the international economy. If his domestic economic program is to succeed, the leader of what Mr. Clinton described as the world's only superpower must enlist the world's other economic powers on behalf a common program of high growth and fair trade.

Mr. Clinton got the budget-reform part of the economic challenge just about right. Unfortunately, that is only the beginning of his several economic tests, and none offers him much room for error.

Robert Kuttner writes a column on economic matters.

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