WORLD

IN SEARCH OF A TURNAROUND

THE CLINTON TEAM PREPARES PLANS TO KICK-START THE ECONOMY AND CUT THE DEFICIT AT THE SAME TIME

ANDREW BILSKI February 8 1993
WORLD

IN SEARCH OF A TURNAROUND

THE CLINTON TEAM PREPARES PLANS TO KICK-START THE ECONOMY AND CUT THE DEFICIT AT THE SAME TIME

ANDREW BILSKI February 8 1993

IN SEARCH OF A TURNAROUND

WORLD

THE CLINTON TEAM PREPARES PLANS TO KICK-START THE ECONOMY AND CUT THE DEFICIT AT THE SAME TIME

ANDREW BILSKI

HILARY MACKENZIE

President Bill Clinton, who promised to focus “like a laser beam” on the U.S. economy, got some good news and some bad news during his first full week in office. The good news: the U.S. commerce department announced that strong consumer spending in last year’s closing quarter pushed growth up sharply, powering the economy to its best performance in three years in 1992. The upturn means that Clinton, who had considered stimulating the recession-hit economy by spending an additional $25 billion to $38 billion this year, may propose a more modest economic package in his State of the Union address on Feb. 17. And the bad news? The Congressional Budget Office released new estimates showing that the federal budget deficit for the current fiscal year will hit a record $391 billion—and that it will double by the year 2003—unless taxes are raised and programs cut. The rising debt will make it increasingly difficult for Clinton to meet his campaign goal—already lowered before his inauguration—of halving the deficit in four years. At the same time, new evidence emerged that it will take more than a slight turnaround to get the U.S. economy functioning well. Several major corporations, including IBM and Sears, announced massive layoffs that will swell the ranks of America’s unemployed—currently 7.3 per cent of the workforce.

The mixed economic signs exacerbated a debate in Congress between proponents of increased spending to jump-start the economy and those who favor deficit reduction. Last

week, Labor Secretary Robert Reich, an advocate of stimulus, outlined Clinton’s expected two-track program. He said that the President would likely propose a scaled-down economic stimulus package in the range of $19 billion to $25 billion to be spent this year on public works and job training. But he added that “in the longer term we are going to have to tackle the budget deficit.” That would likely entail raising some taxes and cutting some government programs—unpopular decisions for the 34 Senators, 22 of them Democrats, who face reelection in 1994. Meanwhile, some analysts questioned whether the President can attain either goal by pursuing both simultaneously. Said Jeffrey Faux, president of the nonpartisan Washington-based Economic Policy Institute: “You can breathe in and stimulate the economy and then you can breathe out and reduce the deficit. You can’t do both at the same time.” The new congressional estimates also showed the $391-billion budget deficit—driven by payments on the $5-trillion national debt—doubling in a decade. That renewed

pressure on Clinton to include concrete deficitreduction proposals in his economic plan. According to the Budget Office, rapidly rising costs of Medicare and Medicaid health programs for the elderly and poor are the main reason for the huge increases. It warned that it will be difficult to reduce federal health-care costs at the same time that Clinton plans to extend coverage to the estimated 37 million Americans who lack health insurance. Last week, Clinton formally put that problem in the lap of his lawyer wife, Hillary. Appointing her chairman of the President’s Task Force on National Health Care Reform, he asked for a reform plan to be ready for Congress by May.

To slash the deficit, Budget Director Leon Panetta said that he would propose $2 worth of spending cuts for every $1 in tax increases. The cuts would likely be made in defence and social programs, while the increases would come from higher income taxes on the rich and a likely new energy consumption tax—hitting the middle class despite Clinton’s promise not to do so. White House spokesman George Stephanopoulos said that all options are being considered, including energy taxes, spending cuts, health-care cost proposals and trimming the overall size of the federal government.

Meanwhile, Faux and some other experts argue that, even at $25 billion, Clinton’s economic stimulus would be too small to have a major effect in the context of a $7.6-trillion economy. That falls well short of the $75 billion in increased spending that Nobel laureate

James Tobin and other Clinton advisers have advocated. And it is paltry compared with the $110-billion spending spree under way in recession-hit Japan where the $3.8-trillion economy is half the size of the U.S. economy.

Still, other major Western leaders are taking a different route. Britain is focusing attention on reducing its $85-billion budget deficit. Despite 10.5-per-cent unemployment, which many economists say is the biggest obstacle to sustained recovery, Prime Minister John Major’s Conservative government is not planning any massive spending to create jobs—at least for the time being. Said Andrew Britton, director of the National Institute of Economic and Social Research, a London think-tank: “There are lessons to be learned from the Clinton administration, if it is successful, which might be translated over here. They are trying out some ideas which could be relevant to us.”

Similarly, Thomas Van Düsen, a spokesman for Finance Minister Donald Mazankowski, said that Ottawa has no plans to increase public spending beyond programs already announced, including a $4.4-billion commitment to build 50 new helicopters for the military, a $500-million highway-improvement project and a $290-million investment in the Hibernia offshore oil development. Even with unemployment at 11.5 per cent, Prime Minister Brian Mulroney’s Conservative government says that its top

priority is reducing the $34.4-billion budget deficit. Said Van Dusen: “There may be some more programs in the [next] budget, but we are not going on any large-scale spending spree.” But NDP finance critic Steven Langdon, for one, argues that Canada must invest more heavily in its infrastructure. Said Langdon: “If they do that in the United States and we don’t have some parallel efforts in Canada, we are talking about a payoff to the States in five or 10 years that’s going to make them significantly more competitive than we are.”

Although the details of Clinton’s economic plan will not be made public until Feb. 17, Federal Reserve chairman Alan Greenspan, America’s central banker, said last week that he agreed with its “general thrust.” Greenspan, widely considered the nation’s most powerful economic policy-maker, told a congressional committee that he did not think that a $2 5-billion stimulus would overheat the economy and force his institution to raise interest rates to dampen a new outbreak of inflation. He also said that financial markets welcome Clinton’s commitment to reduce the deficit. It was a welcome seal of approval for a new President buffetted by mixed economic signals.

ANDREW BILSKI with HILARY MACKENZIE in Washington and correspondents’ reports