Clinton's Economic Balancing Act

February 21, 1993|By JEFF FAUX

At the end of his speech Wednesday night, President Clinton asked the audience to judge his plan not so much according to what's in it for "you and me" but according to what's in it for "us." That's certainly the better criterion. But before you can apply it, you have to decide what you think is most in the national interest.

There are four major economic goals embedded in President Clinton's budget plan: deficit reduction, fairness of sacrifice, near-term job creation and long-term economic growth. Not all can be pursued with equal vigor. And there is some trade-off between deficit reduction and job growth. Therefore, how you evaluate Mr. Clinton's program will depend on which goals you think are the most important for the country.

Let's start with the deficit. Deficit "hawks" should be pleased with the Clinton budget. True, the president does not cut the deficit in half, as he promised during the campaign. But the deficit has risen since then, and his latest proposal would cut the deficit in four years by $140 billion -- roughly the amount that was half the budget deficit at the time he made the promise.

Perhaps he should have known last summer that the deficit would turn out to be higher once he moved into the White House. But Republican complaints on that score ring hollow, since Mr. Clinton was using George Bush's numbers. Moreover, unlike Mr. Bush's budget submissions, Mr. Clinton's has specified in agonizing detail how much will be cut out of spending programs and how much will come from taxes.

Whatever you think of his choices, its nice to have a president who doesn't pass the buck. So, from the green-eyeshade crowd who have despaired of our ever getting control of the deficit, Mr. Clinton should get a reasonably high mark.

He also did pretty well from the point of view of the "populists," XTC outraged that the average working stiff spent most of the 1980s paying the freight for the rich. Mr. Clinton's tax program sends most of the bill for the last decade's excesses to those who went to the party.

The bulk of the new revenue comes from raising marginal tax rates on the highest incomes, removal of the earnings cap for the Medicare tax, increases in the estate tax and some increased taxation for large corporations. Almost all of the sacrifice here is concentrated at the top. And it includes a proposal to bar corporations from deducting salaries of more than a million dollars as a business expense. This one doesn't bring in much revenue, but it establishes the populist principle that there is social limit to how much you can milk from the system.

The middle class will be nicked by the energy tax. But by spreading the tax over all the sources of energy, the impact on any one type of household or business is limited. Still, for people with low incomes, any new regressive tax will hurt. So the plan also calls for an expansion of the earned income tax credit, which helps the working poor get over the poverty line. It also provides more help for poor families in insulating their homes and paying their heating bills.

Mr. Clinton resisted demands for a higher tax only on gasoline, which would have caused real pain to those who have to rely on automobile transportation.

The next effect of all the tax and all the spending proposals on family incomes somewhat reverses the upward distribution of incomes which occurred during the Reagan-Bush era. This time, the financial discomfort will rise as your income rises. Those at the very bottom (making $10,000 or less) will see their incomes rise by about 5 percent. Those at the top (making $100,000 or more) will see their incomes drop by a little less than 2 percent.

People who think that creating jobs now is the number one problem may be a little less enthusiastic about the Clinton plan.

The good news is that he rejected the advice of those who claim we no longer need an economic stimulus because the economy is growing fast enough. As the president points out, we still have more than 9 million people out of work. So he plans a temporary increase in deficit spending to generate another 500,000 jobs in 1993.

The bad news on jobs is that starting in 1994 -- when the unemployment rate is still expected to be 6.4 percent -- deficit reduction takes over. At that point, the federal government will actually begin taking more out of the economy than it is putting in. This is bound to suppress job growth.

The president is betting that by next year the economy will be robust enough to create jobs on its own, despite the negative effect of deficit reduction. Let's hope he's right, but he seems to be leaving a lot to chance and to the hope that Federal Reserve Board Chairman Alan Greenspan, a Republican, will do a better job at keeping interest rates down for him than Mr. Greenspan did for George Bush.

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