WASHINGTON -- After a year and a half of seeking faster
economic growth, the Clinton administration has now reluctantly changed course, putting the stability of financial markets ahead of rapid economic expansion.
No longer do administration officials promote low interest rates and a falling dollar. The economy's health, coupled with the political uncertainties that have led an already weak dollar to sag further, has driven the administration to abandon those early policies.
The forces driving the shift became clearer in the last week, as the dollar's slump forced 16 countries to come to its rescue on Wednesday. And on Friday, U.S. employment figures provided new evidence that the slow, jobless recovery that began in 1993 was now neither slow nor jobless.
As a result, officials now appear resigned to higher rates and a strong dollar -- two policies that will brake the economy and dampen job creation this year.
The shift has been expressed most clearly by Treasury Secretary Lloyd M. Bentsen. Three weeks ago, he expressed without criticism his expectation of further increases in short-term interest rates of up to half a percentage point by the Federal Reserve. And on Wednesday, he organized the international rescue of the dollar.
"This administration sees no advantage in an undervalued currency," he said then.
The goal of the shift in policy is not to stop the recovery. The aim is to do whatever possible to ensure that the economic expansion is as long and inflation-free as possible -- ideally lasting through the next presidential election in 1996.
"Growth is good for this society as long as it doesn't pass the point of tripping off inflation," Alan S. Blinder, one of the administration's most influential economists, testified before a congressional committee on Friday.
But Mr. Blinder, an economist from Princeton University and a member of the White House's Council of Economic Advisers who has been nominated by President Clinton to become the Fed's next vice chairman, gave an unusually cautious definition, at least for a Democrat, of how much growth could trip off inflation.
If growth persists for longer than two years at an annual pace of 3 percent -- a fairly modest rate -- then inflation could resume, he warned.
The Clinton administration's shift could prove unpopular with liberal Democrats who have criticized the Fed for its rate increases. But it is in keeping with Mr. Clinton's political goal of positioning himself as a Democrat who is not feared on Wall Street.
More basically, it reflects a basic change in the administration's view of where the real risks lie in the economy.
In the 1992 presidential campaign, Mr. Clinton made reviving a moribund economy his central promise and talked of stimulating the economy with federal spending programs, usually described investments. "We have to both bring down the deficit and get our economy going through these kinds of investments in order to get the kind of wealth and jobs and incomes we need in America," he said in a presidential debate on Oct. 16, 1992.
That talk faded in office, particularly after congressional Republicans defeated the president's economic stimulus proposal a year ago. Administration officials then began pointing to low interest rates as the engine of recovery.
But, as Mr. Blinder said on Friday, back then, pursuing faster growth by holding down rates posed little risk of inflation, while slow growth posed a strong danger of keeping millions of Americans out of work.
Now, he said, the economy is so close to producing at maximum output that inflation has become more of a worry. Growth that is too fast is now as dangerous as growth that is too slow. "The
risks are not one-sided" any more, Mr. Blinder said.
Robert E. Rubin, the head of the president's National Economic Council, said in a telephone interview yesterday that the American economic policy had been consistent since Mr. Clinton won the election.
The difference now, Mr. Rubin said, is that the American economy is much further along in the business cycle.
"When we took office, what we wanted to do was get a sustained recovery going, and that is what we have accomplished and put ourselves on a path that on average, over time, will produce solid growth and moderate inflation," he said.
As a result, administration officials now pay more attention to inflation, although they also continue to watch for signs of slowing growth, Mr. Rubin said.
"With growth now at a healthy rate, people are more focused on the issue of inflation than they were when growth was low," he said. "And as you would expect with higher growth, people expect slightly higher inflation, but they still expect inflation to be at moderate levels."