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PAINFUL VISION

Ronald Reagan had it. George Bush lacked it utterly. But just moments after Bill Clinton stepped before a joint session of Congress on Feb. 17 to unveil his activist economic blueprint, it became clear that once again, America has a President with vision.

Here is Clinton's: a humming, high-tech future where jobs are secure, tomorrows are bright, and government seed money helps to create new jobs and investment. "If we have the vision, the heart, and the will to make the changes we must," the President said in his speech, "we can still enter the 21st century with possibilities our parents could not even have imagined."

Clinton's brand of hands-on economics calls on the government to solve myriad social problems while putting the runaway federal deficit on a downward path. It's both exceedingly complex and chock full of contradictions. Among them: Can Clinton raise taxes on business, the wealthy, and the middle class, yet increase investment? Can he stimulate the economy to produce more jobs, trim health costs, and raise productivity--all while cutting the deficit?

SEA CHANGE. For all its obvious faults, Reaganism was stunning in its simplicity--slash taxes, unleash the private sector, and boost defense spending to scare the Soviets. And unlike Reagan's 1981 economic program, Clinton's plan relies on two spoonfuls of bitter medicine, the second-largest tax hike in America's history and budget cuts aimed at popular programs. Reagan got most of what he sought from Capitol Hill, but the Clinton plan will prove harder to swallow, even for a Democratic Congress.

Although Clinton portrays himself as a healer of a sick economy, he is coming on as the un-Reagan, determined to undo 12 years of laissez-faire. Gone is the faith that tax cuts are a sure-fire elixir for growth. Instead, a complex mix of tax hikes and new tax incentives, of spending cuts and new targeted outlays is intended to steer the economy into more productive channels. "This reverses the policy of the last 12 years," says Budget Director Leon E. Panetta. "It changes our priorities, targets investments, and tries to restore some discipline so we can pay our bills."

Higher taxes, condemned in the Reagan-Bush era as economic poison, are now seen as a positive by Clintonites. A tax on energy, designed to raise $71 billion over five years, is proposed "not primarily as a revenue-raiser, but primarily as a conservation measure," says Council of Economic Advisers chair Laura D'Andrea Tyson.

Like Reaganomics, Clinton's cure counts on a healthy dose of business support in the form of increased investment and, above all, job creation. Yet early reaction has not been entirely reassuring. True, on Feb. 17, bond traders, savoring the package's disinflationary aspects, traded the long bond down to 7.1%--the lowest closing yield ever for the 30-year issue. But word of tax increases for corporations and high-income individuals put the stock market into a funk. On Feb. 16, the Dow Jones industrial average dropped nearly 83 points (page 7745). "I don't think the economy is going to be robust enough to absorb this sort of tax increase," worries Robert G. Herndon, executive vice-president at retailer Pier 1 Imports Inc. "Shareholders will end up losing."

In an era of instant communications and talk-show hysteria, Main Street will likely be more influential than Wall Street. Here, the White House might fare better. Clinton broke his promise to the middle class not to raise taxes less than a month after taking office, but voters seem resigned to the prospect. "I'd like to get the economy back on track," says Andre Roman, a 28-year-old Denver bakery worker. "If paying more taxes will do it, it doesn't bother me."

INCENDIARY. Similarly, Elsie Roby Yanders, a 35-year-old senior financial consultant in Merrill Lynch & Co.'s Pittsburgh office says she doesn't see Clinton's backtracking on taxes as a betrayal. "We cannot continue business as usual, that's for sure."

Some executives admired the sweep and ambition of Clinton's plan. Says Ford Motor Co. CEO Harold A. Poling: "If he ends up reducing the deficit, it's directionally right. It's a brave approach." But many more execs were disappointed by what they see as a great Presidential wimp-out on deficit reduction, crystallized by Clinton's failure to back budgetmeister Panetta in his quest for a 2-to-1 ratio of spending cuts and tax hikes. "I don't think the cuts are deep enough," says John S. Hendricks, chairman of Discovery Communications Inc., a Bethesda (Md.) cable-TV programmer. "They have cut into the growth in spending, not actual spending."

Clinton's new taxes are the most incendiary part of his plan. On top of a net tax hike of $245 billion over five years, the plan goes a long way toward undoing 1986's tax reform by restoring higher brackets and tax preferences. The top individual rate will jump from 31% to 36% for couples with taxable incomes above $140,000. For those with incomes over $250,000, a 10% surtax raises the effective marginal rate to 39.6%--the highest since Jimmy Carter. The corporate rate will climb from 34% to 36%.

Higher tax rates help pay for some goodies: a two-year investment tax credit for increased equipment purchases, a permanent 7% credit for the smallest companies, and a permanent research and development credit. There's also a capital-gains tax cut, but one sliced thin enough to read a prospectus through: Taxpayers would be allowed to exclude from income 50% of the gain from the sale of stock held for five years or more in companies with less than $25 million in capital.

But Clinton's tax plan also will affect those lower on the income scale. A four-year, $6.6 billion increase in the earned-income tax credit should ease the burden for the working poor. But a tax on the energy content of coal, heating oil, natural gas, nuclear power, and gasoline would hit virtually all Americans.

Nor will the energy tax go down well with energy-dependent industries. "We want to make sure that we don't put ourselves in a noncompetitive situation," says Don Fuqua, president of the Aerospace Industries Assn. Says Delta Air Lines Inc. CEO Ronald W. Allen: "Congress needs to fully assess the proposal's impact on jobs, capital investment, service, and profitability." Atlanta-based Southern Co., a big utility, doesn't trust the Administration to spend the windfall wisely. "If the President is serious about deficit reduction, he should get the government's house in order first and reduce spending," says a company spokesman. Tax hikes should only come later.

SWEETENERS. Lurking among Clinton's proposed cuts is one that's sure to cause controversy. The President wants to tax 85% of Social Security retirement benefits for seniors with joint incomes over $32,000. "This is money we have worked for many years to have, and it's an abuse to include us in his budget cuts," says Elisa Canosa, a 70-year-old Miami resident. More direct is the plan to cut medicare payments by trimming $50 billion over five years from payments to doctors and hospitals. Other cuts in medicaid and other mandatory spending programs bring the total savings in entitlements to $99 billion by 1998.

Then there are provisions that seem aimed directly at George Bush's country club chums: a cap on corporate deductions for executive salaries over $1 million, an end to the deductibility of all club dues, and a further reduction in the deductibility of business entertainment.

To help persuade Congress to buy his plan, Clinton is mounting a massive grass-roots effort to build the kind of public support lawmakers can't ignore. The day after his speech, he left for a multistate trip to push the program in St. Louis, Chillicothe, Ohio, and Hyde Park, N. Y.--the first leg of a cross-country odyssey expected to last weeks. He ordered his Cabinet Secretaries to hit the road as part of the national sell-athon. The White House is hoping to enlist groups representing seniors, labor, and other constituencies that can persuade their millions of members to write and call lawmakers. The goal: a groundswell of support that will drown out Republican cries of "tax and spend."

To further sweeten the pie, Clinton's plan contains a 1993 stimulative jolt mf $31 billion designed to get companies hiring again. "I almost think of it as a token showing," says Craig Benson, CEO of Cabletron Systems Inc., a manufacturer of computer-networking hardware based in Rochester, N. H. He adds, though: "I like the cuts in the White House staff. It makes a statement."

Why did Clinton fall short of his goal to cut outlays? One reason is that defense spending, which doubled under President Reagan, will decline only a bit more steeply than projected by the Bush Administration. Clinton's proposal cuts only $32 billion in fiscal 1997 from the Bush plan, still leaving a defense budget of a quarter of a trillion dollars. Yet defense contractors remain worried. Says Norman R. Augustine, CEO of Martin Marietta Corp.: "Four times in this century we've faced this situation and cut defense spending too deeply and paid a steep price in lives for it later on."

Congress shares many of the executives' concerns. Democrats on the Hill want to join forces with Clinton, but many are skittish about public reaction to higher taxes. Representative Martin Frost (D-Tex.) offers two cheers for his President: "Obviously, people are going to be concerned about increases in taxes. But people want something to be done. And this sounds like a balanced plan, a fair plan."

Hill Republicans see things differently. "The President promised a bold experiment but outlined the same old tired rhetoric of more taxes and more spending," sniffs Senator Connie Mack (R-Fla.). "Although he used a Reagan approach, he delivered a Carter message."

GOP partisans also have blasted Clinton's claim that he was unable to fulfill his pledge to cut the deficit in half by 1997 because he did not learn until after the election how bad it was. They pointed to an interview in the July 6 issue of BUSINESS WEEK in which candidate Clinton declared: "When I began the campaign, the projected deficit was $250 billion. Now it's up to $400 billion."

Outgunned Hill Republicans can only create mischief. The key voting bloc is moderate House Democrats, who are irked that Clinton didn't cut spending more. Rejecting deeper entitlement cuts, says Representative Charles W. Stenholm (D-Tex.), chairman of the Conservative Democratic Forum, "made it very difficult to deal with our budget deficit. I wish that they would have come up with a much stronger plan."

FULL-COURT PRESS. Clinton's plan is bound to undergo significant surgery during the expected five-month struggle on the Hill. And in the end, his success or failure may depend on whether he's as effective a pitchman as the Gipper. The President "starts off with an awful lot of goodwill," says Murray L. Weidenbaum, Reagan's first chief economist. "And he's a good salesman. If he sold used cars, he'd make a fortune."

But despite the President's political skills and the full-court press from the White House, Clinton campaign adviser Samuel Popkin is not yet convinced that Clinton will prevail. "People haven't bought his vision yet," he says. "What counts is how firmly he stands in the next four months."

If Clinton pushes his plan through Congress more or less intact, and if an already buoyant economy moves into a sustained expansion, no one will know or care whether all this Clintonian tinkering was responsible. Instead, the business cycle will propel Clinton to glory--and four more years of experimenting with the levers of government.CLINTON'S 'CALL TO ARMS'

Here are the major initiatives in the President's economic plan:

HIGHER

INCOME TAXES

A hike in the top individual tax rate from 31% to 36% for households with

taxable incomes of $140,000. A 10% surtax would be applied to households with

incomes of $250,000 or above, producing a top marginal rate of about 40%

NEW

ENERGY

TAXES

A broad-based tax on energy consumption would apply to producers of coal,

natural gas, oil, and nuclear power. After a three-year phase-in, the levy will

raise $22 billion a year. A family earning $60,000 would pay $133 next year,

and about $400 in 1997

HIGHER

CORPORATE

TAXES

An increase from 34% to 36% in the current top corporate tax rate. This would

be partly offset by a temporary investment tax credit and a permanent research

and development tax credit. The ITC, retroactive to December, 1992, will save

corporations about $20 billion over three years

SPENDING

CUTS

Defense spending would be cut by an additional $76 billion over four years.

Domestic spending will be trimmed by $141 billion, including nearly $100

billion in reduced spending for entitlements. The federal work force will be

reduced by 100,000, or 3.4%, by 1995

NEW

SPENDING

A stimulus package of $16 billion. Part would be devoted to

infrastructure--highways, bridges, and high technology projects. The rest would

be spent on unemployment benefits, worker retraining, and a variety of new

programs, including summer youth jobs

DATA: BUSINESS WEEK

Paul Magnusson, Susan B. Garland, and Richard S. Dunham in Washington, with bureau reports


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