The deficit hawks, it appeared, had won Round One in the continuing struggle to control the next administration’s priorities. By Clinton’s own pronouncement, the cause of deficit reduction was now coequal with his core program for substantially increasing investment in the nation’s economic future-his campaign promises for a massive overhaul of the U.S. health-care system, tax-subsidized worker retraining, national education reform and all the rest of it. But the truth was, President Bill had no real choice: the deficit, which by one preliminary estimate by the Clinton camp is now trending toward $400 billion for 1994, looms over his political future like the monster from some campy horror flick-The Blob That Ate the Beltway. Aside from its inhibiting effects on the economy at large, the deficit handcuffs, stifles and stymies Clinton’s ambitious hopes to use the power of the federal government to build sustained national prosperity. So while there is no sign that he has abandoned or modified those hopes, the deficit poses a fiscal and political dilemma that Clinton cannot dodge: simply put, he cannot pay for his campaign promises unless he controls The Blob.
The current policy debate is considerably more complicated than that, of course. Beyond the Clinton campaign mantra-“The economy, stupid”-lies a welter of perplexing questions. Which economy? The economy of winter 1993, the economy of election year 1996 or the economy of the year 2000? All are relevant to the Clinton program and the success or failure of Clinton’s presidency. But their policy implications-short term, middle term and long term-are arguably in conflict. If the incoming administration’s primary goal is to accelerate the current recovery, it could try to stimulate the economy with tax incentives and government spending. During the campaign, and as recently as last week, Clinton’s advisers considered doing both. The internal debate is far from settled: Clinton’s inner circle has its share of “deficit doves” and Clinton himself is said to be skeptical that the deficit, as one aide put it last week, is “an end in itself.”
But a policy of short-term stimulus poses big risks. The first is economic-overheating the economy and, perhaps, rekindling inflation. The second is fiscal-making the deficit worse, thus intensifying the congressional budget battles that lie ahead. And the third is political-blowing Clinton’s fragile credibility with the bankers, brokers and financial gurus who manage U.S. capital markets. “It’s easy to overinflate, and very hard to undo the damage once you do,” said Stuart Eizenstat, who as Jimmy Carter’s domestic-policy adviser must recognize this pitfall. “If you err, it ought to be on the side of less.”
Clinton gave every sign last week that this message-less is more-was on his mind. As he introduced key members of his economic-policy team at a Little Rock press conference, there was no talk of short-term stimulus. Instead, Clinton and his advisers emphasized the fact that they had inherited two long-term deficits, the budget deficit and an “investment deficit.” The “investment deficit” was government’s failure, through the Reagan-Bush years, to do all the things that Clinton wants to do: improve U.S. economic productivity by a combination of government programs and stepped-up private-sector investment.
These twin deficits “won’t be corrected overnight,” warned Sen. Lloyd Bentsen, Clinton’s nominee for secretary of the treasury, who added optimistically that the public “is not asking for miracles.” Investment banker Roger Altman, who is to be Bentsen’s No. 2 at Treasury, echoed this call for patience and restraint. So did Panetta, and so did Alice Rivlin, the former director of the Congressional Budget Office (and well-known deficit hawk) who was named Panetta’s deputy at OMB. “We’re all going to sound a little bit alike,” conceded Robert Rubin, the Goldman, Sachs investment banking whiz who will direct the Clinton administrations new national economic council. They did sound alike-and the clear intent, at this critical stage in the transition, was both to reassure U.S. financial markets and lower public expectations for Clinton’s first 100 days.
Drawn from Congress and from Wall Street, Clinton’s economic advisers are establishment insiders-pragmatists, centrists and doers, nonideological Democrats whose mission, it seemed, was to break the Beltway gridlock and get the job done. “Terrific,” said John P. White, Jimmy Carter’s deputy budget director and the man who drew up Ross Perot’s ironfisted plan to eliminate the deficit. “Nobody in that group has an illusions about how hard it’s going to be.” Other key appointments followed. Robert Reich, Clinton’s longtime friend and an economics lecturer at Harvard, will be secretary of labor. Laura D’Andrea Tyson, an economist at the University of California, Berkeley, will head the Council of Economic Advisers, and Ron Brown, chairman of the Democratic Party, will be commerce secretary. Clinton also announced a surprising choice for White House chief of staff-Thomas (Mack) McLarty, the president of Arkla Inc., a natural-gas company, and another longtime friend. Insiders said McLarty will be a low-key, low-profile ad n certainly no John Sununu, whose cock certitudes and abrasive style did much to sour the Bush administration’s relations with Capitol Hill.
And Capitol Hill is crucial. The fact that Democrats now control both the presidency and Congress is almost irrelevant, given the deficit problem and the enormous scope of what Clinton plans to do. “The Democrats have gotten in and they cant do what they want to do because they have this monstrous burden of debt,” says political analyst William Schneider of the American Enterprise Institute, a conservative Washington think tank. “It means they’re trapped in Reaganomics. It means Reagan succeeded in setting the agenda.” Precisely right-and to change that agenda, Clinton and Congress must gradually bring the deficit under control. The Perot plan, which called for actually balancing the federal budget, was overkill. As White says, Clinton and Congress will succeed if they can reduce the deficit to the range of $130 billion to $160 billion a year by 1996.
Those who crunch the numbers, like Panetta and Alice Rivlin, are all too aware of excruciating political choices that must be made to achieve this goal. Broadly speaking, the deficit cannot be reduced enough with the kinds of tax increases and spending cuts that liberals favor-savaging the Defense Department budget, for example, or raising taxes on the wealthy. The biggest single cause of the government’s fiscal crisis is the inexorable upward spiral in the cost of entitlement programs like Medicare and Medicaid. Almost no one says these benefit programs can actually be cut, of course: the real goal is merely to limit, or “cap,” the rising costs. But even that, in the wary view of many congressional veterans, may be politically suicidal. Few in Congress have forgotten the explosion of senior-citizen rage over a modest Medicare-fee increase in 1988-or the fact that so many of their colleagues cravenly reversed themselves on the issue.
The other way out is to raise taxes-something major, a real revenue raiser. Clinton has already rejected the idea of a significant increase in the federal gasoline tax, which (whatever its merits) is hugely unpopular with the public. But there is speculation in Washington that the new administration may ultimately be forced to seek a value-added tax, or VAT, which is essentially a national sales tax on most forms of manufactured goods. There is also talk about Perot’s idea for raising the income-tax rate on social-security benefits to affluent retirees. “I don’t think social security should be off limits in the debate,” White says. He thinks the conventional wisdom-that entitlements and social security are politically untouchable-is “wrong and out of date. Not only are the American people ahead of the politicians on this, the relevant interest groups will also go along if you go to them with a reasonable proposal. They want fairness for their members, that’s all.”
All this-the trade-offs, the tough choices, the focus on the nation’s long-range problems-is the subject of this week’s Clintonomics conference in Little Rock. The president-elect will be master of ceremonies, hobnobbing among the various discussion groups, talking and listening as he did during the third presidential debate. The proceedings, 12 hours over two days, will be broadcast on C-Span, and National Public Radio will lend its 800 number for calls from around the nation. The event, mostly public relations, will nonetheless be educational and may help Clinton build consensus for his expect-no-miracles approach. The 300 invited guests, who must pay their own way to Little Rock, include economists, corporate CEOs, bankers, unionists-and John P. White, who said that he has no intention of muffling his urgently hawkish views on the deficit. “For $1,000 of my own money I get to be a spear carrier on C-Span,” laughed MIT economist Paul Krugman. “But of course I’m going. How could I not?”
The crucial choices, meanwhile, are even now being made behind the scenes. The economics transition team headed by Robert Reich will give Clinton a “menu” of policy options this week. Clinton will study it, then convene his economics appointees during the week before Christmas to make selections from this list. But the operative point is that Clinton himself is taking charge: he will be the chairman of the national economic council, and he will be the final arbiter of the best strategy for change. As to the deficit, Clinton joked last week that he was giving budget chief Panetta “a chance to teach me some math.” Here’s hoping the next president learns quickly and well-for everything depends on it, and the dismal numbers are piling up.
