Slaying deficit won't create recovery

Robert Kuttner

August 10, 1993|By Robert Kuttner

LET me crawl out on a limb and forecast that for all the fanfare and editorial praise, the slaying of the deficit will not ignite a recovery. By raising taxes and cutting taxes, the deficit-reduction deal reduces purchasing power by $80 billion next year alone. This contraction will dwarf the tonic effect of lower interest rates.

Earlier this year, the Federal Reserve Board did cut rates. But despite lower interest rates, the economy grew at less than 2 percent in the first half of 1993.

Lately, the Fed's Open Market Committee has voted twice in a row-- in May and July -- against any further monetary easing. And Fed chairman Alan Greenspan has said on the record that he expects rates to move slightly upward, not downward.

So there is nothing on the horizon to suggest anything other than a continuation of slow growth, stagnant purchasing power, insufficient investment and a relatively jobless recovery.

The administration's own economists are aware of this. All three members of his Council of Economic Advisers strongly favored the stimulus part of the president's original program, which was blocked by a Republican filibuster last March. In recent months, the council has steadily revised its forecast of economic growth downward.

With only one exception, the Clinton budget is surprisingly conservative. It reduces most categories of social spending. It appropriates slightly less money for public investment and for research than the last Bush budget. It accepts the conservative shibboleth that deficit-reduction is paramount. The budget is resolutely progressive only in the manner in which it raises taxes -- on the rich.

The president also made a tactical decision that this would be a Democrats-only budget. It was devised and brokered virtually without Republican consultation.

With this budget, President Clinton has set himself a political trap. If (when) the economy fails to revive, the Republican opposition will remind voters that virtually every GOP legislator voted nay.

Why did the president embrace this approach? There are four basic reasons.

* The Albatross Effect. People view the deficit as an economic albatross and failure to slay it as a political default. That conventional view may be wrong, the White House concluded, but it is a political fact. Even if its hazards are overstated -- even if deficit-reduction slows the economy -- better to get it out of the way early.

* Winning Beats Losing. A new president with a shaky mandate above all needed to demonstrate resolve and leadership. Passing a budget -- even one at odds with many of Mr. Clinton's own priorities -- was necessary to end the public frustration with legislative deadlock.

* Pre-empting Perot. Ross Perot, representing 19 percent of the electorate, defined the deficit as the central economic and political test of the new administration. By accepting that definition, Mr. Clinton hoped to woo Perot voters.

* The Cheap Money Cure. In Mr. Clinton's first months, he was urged by his own deficit hawks to make deficit-reduction paramount. These advisers -- Treasury Secretary Lloyd Bentsen, National Economic Council chairman Robert Rubin, and OMB director Leon Panetta, predicted that a commitment to cut the deficit would be rewarded with low interest rates. When rates did come down during the first quarter of 1993, Mr. Clinton became a believer.

But was this the only possible course? Was it the wisest course?

Downplaying deficit reduction might well have left the president better positioned both politically and economically. Rather than taking it as a given, Mr. Clinton could have challenged the conventional view of the deficit.

Mr. Clinton could also have attacked Mr. Perot, whose arithmetic cannot withstand serious scrutiny. Instead of using every ounce of his influence to pass a contractionary budget, he could have pressed for one that promised higher growth.

At 54 percent of gross national product, the national debt is lower today than it was during most of the post-World War II boom. If the economy of 1945-1973 could grow despite a much bigger relative debt load, today's lower debt need not be disabling. It is desirable to keep the debt from continuing to increase faster than GNP, but that requires only a deficit cut of about $350 billion over five years, not $500 billion (assuming that less deficit-reduction yields higher growth).

If Mr. Clinton had advocated that path, he might have attracted a very different budget coalition -- even a bipartisan one. Had he raised taxes less and allocated more to both public investment and incentives for private investment, he might have peeled off some supply-side Republican supporters.

Passage of the budget will temporarily enhance Mr. Clinton's image as a leader. But those gains will quickly fade when the economy fails to recover. At that point, Mr. Clinton will need to revive the idea of a big stimulus program, aimed at higher public and private investment, and relying on federal borrowing (and temporarily swelling the deficit).

Such a policy reversal would be even more awkward than others in recent memory, since the president has spent the entire budget season explaining what a monster the deficit is. But it would bring Mr. Clinton full circle to his original position, which is better economics and wiser politics.

Robert Kuttner writes a column on economic matters.

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