On Jan. 20, William Jefferson Clinton will stand on the steps of the U. S. Capitol, take the oath of office as the nation's 42nd President, and usher in what he hopes is a bright new era. At 46, Clinton is the second-youngest American to be elected President, after John F. Kennedy. And as the leader of his generation, he has promised momentous changes. The man from Hope, Ark., vows to restore the nation's tattered faith in government. But Clinton doesn't want to stop there. He aims to rebuild the American economy, brick by brick, highway by highway, schoolroom by schoolroom.
That's very different from Ronald Reagan, who believed that a big across-the-board tax cut was the perfect tonic for nearly all that ailed the economy. Indeed, Clinton's micro focus is what's truly new about his economic policy.
Since the election, Washington and Wall Street have been obsessed by how big a stimulus program Clinton will embrace, and by whether he'll cut taxes for the middle class. Yet this fascination with macroeconomic policy misses the point. Unlike traditional Democrats, who would spur growth with big doses of fiscal stimulus, Clinton sees the economy as a creaky machine plagued by a hundred different problems. His motto: Talk big. Think small.
Got a pothole? Bill will fill it. Health care too expensive? He'll fix it. Research-and-development growth slowing? He'll promote it. Worker skills lagging? He'll train 'em. "Clinton thinks like a governor," says Brookings Institution economist Barry P. Bosworth. "Name a problem, and he's got four or five little solutions."
Clinton's fondness for microeconomics is no accident. With the deficit topping $300 billion, he has little choice but to approach economic woes one at a time. Says Richard L. Schmalensee, a former Bush economic adviser: "The deficit means you can't throw money at something and bask in the applause."
By targeting government incentives, Clinton hopes to put in place a cut-rate competitiveness policy that removes impediments to growth--without busting the budget. "The point," says one Clinton adviser, "is structural change. We're not going to solve long-term problems by stimulating the economy."
True, Clinton promised short-term economic aid during the campaign. But with a healing economy and a growing deficit, he's scaling back the pump-priming to focus more on long-term investment. Although his agenda is still being hotly debated among Clinton's legions of highly opinionated advisers (page 34), he seems likely to go with a first-year stimulus plan of $20 billion or less, a far cry from the $50 billion sought by liberals.
Clinton's agenda, to be unveiled in February, will include a tax credit for new business investment, a modest capital-gains tax cut for small business, and a grab bag of incentives for investment in new technology. There will be proposals to boost worker training and apprenticeship programs and plans to improve public education. Clinton will take a stab at controlling health costs. He's still interested in a sustained program of investment in public works, but he may cut the four-year, $80 billion infrastructure program he promised during the campaign by as much as half. And Clinton is hedging his support for a middle-class tax cut and softening his opposition to such consumption levies as a higher gasoline tax.
DOUBLE TROUBLE. But the President-elect must still decide how to balance his promises to cut the deficit and boost investment through new tax breaks and direct spending. As fiscal reality sinks in, Clinton seems to be edging away from his campaign vow to slash the deficit in half by 1996. Instead, he's promising to reduce it by $145 billion--still a significant cut if he can pull it off.
The task of simultaneously tackling the fiscal and the investment deficits is "the great dilemma that we face today," Clinton told the Public Broadcasting Service on Jan. 11. "If this were just a government-deficit problem, I think we could solve it rather easily. If we just needed to increase our investment levels . . . we could solve that rather easily."
Clinton hopes to finesse the problem by sprinkling federal seed money on the "knowledge base" of the economy. By improving worker skills, Clintonites believe they can boost productivity and fulfill Clinton's promise of better jobs.
But his desire to spur favored industries and "critical" technologies troubles many executives. "I don't think the President should lay out the technologies that should be implemented," says John Sculley, chief executive of Apple Computer Inc. Adds Conference Board Chief Economist Gail D. Fosler: "Investment comes from the overall economic environment. Business responds to markets and opportunities. It does not invest because the government says to." Counters a senior Clinton adviser: "The government's role is to promote innovation and enable workers to be more productive. We are driven by the god of increased productivity."
To Clinton, that means digging deep into the economic foundation. Robert B. Reich, Clinton's nominee for Labor Secretary, puts it this way: "Behind the business cycle, behind the capacities of fiscal and monetary policy, lies a deeper problem. And that has to do with the quality of jobs."
Productivity and investment. Better jobs. That's the Clinton mantra. And it leads straight to his structural reforms. Even if this microapproach is the right policy, it may face a tough political slog. "Many of the things Clinton has proposed won't pay off for a very long time," says Van Dorn Ooms, chief economist for the Committee for Economic Development. "His greatest challenge will be to persuade people to do things that aren't going to have immediate political payoffs."
'FUTURE' FUNDS. Oh, and there's another question about Clintonomics: Will any of it work? Take investment, perhaps the President-elect's biggest challenge. For Clinton, there can't be enough of it. Public. Private. Physical. Human capital. He's even likely to cast his budget in terms of investment--or what he'll call "future" spending--vs. a "consumption," or operating, budget. The Clintonites reckon that less than 10% of federal spending fits their definition of investment. They vow to do more.
Reich and others have assured Clinton that infrastructure spending will produce a handsome payoff. The former Harvard University lecturer argues that because companies and capital move so easily across borders, a nation's competitive advantage lies in its workers and public infrastructure--the only resources that stay put.
Reich's call for increased public-works spending is buttressed by Bates College economist David A. Aschauer, who contends that such investment packs a powerful economic punch. But others question whether the return on public works really is higher than spending on private investment. "Research on this is too preliminary to base any real conclusions on," says Boston University economist Laurence J. Kotlikoff. "The models are far ahead of the empirical evidence."
What about education and training? No one these days is satisfied with the quality of public schools. Surely, a better-educated work force would be more competitive in the world economy. But how much can the federal government do to fix what is essentially a problem for local governments?
Worker retraining is an even tougher nut. Skills training is a critical element in Clinton's effort to retool the economy. Yet a lot of what has been tried in the past hasn't worked. Studies have shown that older workers don't seem to adapt to retraining, especially if the new job is lower-paying. Success with disadvantaged workers appears to be mixed as well. Stephen H. Bell, an economist at the consulting firm ABT Associates Inc., says wages of poor workers who have participated in training programs have gone up, but not enough. "These programs," he says, "have moved families that are extremely low income to very low income."
Clinton wants business to do much of this training. During the campaign, he said he would require companies to spend 1.5% of their annual payroll to train workers. Lately, aides have hinted that he'll rely more on jawboning to push companies toward his goal. Even so, many executives remain horrified. And that's not surprising, considering the long-standing antagonism among business, labor, and government on training issues. Says Susan N. Houseman, an economist at the W. E. Upjohn Institute for Employment Research in Kalamazoo, Mich.: "There's very little history of corporate-government cooperation in the U. S."
One area where Clinton and Vice-President-elect Al Gore have high hopes for rapprochement with business is their promise to boost technology investment. So far, Silicon Valley loves the attention. "We need to build an infrastructure for the 21st century," says Edward R. McCracken, president of computer maker Silicon Graphics Inc. Says Daniel F. Burton Jr., executive vice-president of the Council on Competitiveness, a private group: "American industry is looking for an expression of support. If industry feels it has a government committed to strengthening investment and productivity, we will see industry become more aggressive."
That's music to Clinton's ears. He'll propose making the R&D tax credit permanent, and he wants to shift as much as $7 billion a year from military R&D to civilian research. But other proposals, such as a promise to create as many as 170 new manufacturing-technology centers, may get scaled back--victims of reality and the deficit crunch.
MURPHY'S LAWS? While they see a role for new public spending, Treasury Secretary-designate Lloyd Bentsen and senior White House economic aide Robert E. Rubin prefer to see government incentives for private investment. That means a tax policy built around an investment credit. Details are still being thrashed out, but the resulting credit will certainly be modest and targeted to equipment purchases.
But the combination of the ITC and a mandate for worker training could produce a perverse result for some workers. Says American Enterprise Institute economist John H. Makin: "Put a tax on labor and subsidize the purchase of new equipment, and you'll increase productivity. And you'll eliminate more jobs."
The law of unintended consequences could also hamper Clinton's attempt to address stingy bank-lending practices, which he believes penalize small business. He would like regulators to ease up on lending. But key Hill Democrats, still tasting the bile of the savings-and-loan-association bailout, may not be quite so enthusiastic.
When it comes to trade, Clinton's microwarriors also think small. The Bush Administration put most of its chips on lengthy multilateral trade talks. But managed-traders such as Laura D. Tyson, Clinton's pick to head the Council of Economic Advisers, think it's just as important to shield crucial high-technology industries until Japan removes its import barriers.
Clinton's competitiveness plan doesn't end there. He wants to restructure environmental regulation, overhaul welfare, and revamp agricultural programs. He also aims to improve the housing stock and boost economic opportunity in inner cities. Clinton, friends sigh, collects solutions the way old vaudeville comics collected jokes. He's got a million of 'em.
And then there's health care, perhaps the toughest of Clinton's structural challenges. Not only has he promised to provide every American with health coverage while reducing the cost of care, he wants to unveil a detailed reform blueprint within a few months. His health team, headed by Georgetown University analyst Judith Feder, has come up with this tentative solution: All employers would provide a core package of minimum benefits. More generous plans would be taxed. And the feds would impose an overall national ceiling on the cost of all health care. It would all be a breathtaking cure--if Dr. Clinton can pull it off.
GO FIGURE. Curiously, for all of his talk about investment, Clinton says very little about national savings. That's not surprising, since it would sooner or later bring him to the one issue he would love to avoid--the deficit. But circumstances, along with his nominee for budget director, Leon E. Panetta, won't let him forget. For Panetta, it's simple. Fix the deficit, and all else will fall into place.
Clinton is no deficit hawk. He views his structural approach as a sort of Democratic supply-side: Boost growth enough, and you can eliminate the deficit without much pain. But as Clinton pores over grim new budget estimates, he's coming to realize that without a vigorous assault on the deficit, he won't have the money to solve all those structural problems. Punting on the budget gap would "be terrible for his ability to lead the country," says Hoover Institution economist John Cogan. It would reduce many of Clinton's carefully crafted schemes to minor tinkering.
Much like Franklin D. Roosevelt, who tried almost anything to drag the U. S. out of the Great Depression, Clinton seems willing to expend enormous energy on making the U. S. more competitive. Most of FDR's recovery schemes failed. Still, Roosevelt's enthusiasm lifted the nation's spirits. And so far, Clinton's early exertions have been infectious, too. His December economic teach-in, which might have been a crashing bore, helped buck up uncertain business executives.
During his transition, Clinton didn't have to do much more than provide the nation with artful rhetoric and populist symbols. The effort has so far convinced many Americans that his Presidency will be a triumph of Hope over experience. But soon, the man from Arkansas will have to start making the tough calls that will define his Presidency. And it'll take more than hope for him to get the economy growing smartly once more.Howard Gleckman, with John Carey and Dean Foust, in Washington and Christopher Farrell in New York