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The Second Year


Cover Story

THE SECOND YEAR

Americans should have the courage to change.

--Bill Clinton, 1992

If any one phrase accounted for Bill Clinton's election victory, it was his plea that recession-weary Americans reject Republican economic lassitude in favor of renewed government activism.

But to the dismay of traditional Democrats--and the relief of Corporate America--President Clinton's freshman year was anything but revolutionary. Clinton installed fiscal conservatives in key economic posts. He watched as his $16.3 billion economic-stimulus package got stomped on Capitol Hill. And his biggest legislative triumphs--bruising fights for a $433 billion deficit-reduction plan and the North American Free Trade Agreement--seemed a continuation of GOP policies.

The party faithful, who think Clinton has abandoned his Putting People First campaign blueprint for something called Bowing to the Bond Market, needn't burn their membership cards just yet. The President has begun to couple his "Change Now" message with the comfy promise of greater "security."

Poring over his polling data, Clinton has discovered that Americans are in the throes of a national anxiety attack over crime, corporate downsizing, and a vexing health system. As Year Two of his Presidency begins, Clinton has done a little strategic repackaging. He has fashioned his domestic programs into a new security blanket that promises to catch the victims of change as they tumble down the economic ladder. With money tight and business skittish about onerous social mandates, however, he had to craft a package whose economic impact will be dwarfed by its fuzzy glow.

POLICY GRAFTS. For Clinton, the transforming event was last year's bitter NAFTA fight. White House pollster Stanley B. Greenberg says the divisive battle showed that the public is far from ready to buy the notion that a global economy means rising living standards. "People still believe, by a significant margin, that trade costs jobs," Greenberg notes. The message for policymakers is clear. As Laura D'Andrea Tyson, head of the Council of Economic Advisers, puts it: "People who are insecure may not have the courage to change. They need new tools to provide security." Indeed, a new BUSINESS WEEK/Harris poll shows that 67% of the public believes that the U.S. must change its policies to provide more economic security (page 80).

All summer, Clinton brooded about the politics of insecurity. During his vacation on Martha's Vineyard, he sketched out some unifying ideas. The goal was to make the prospect of dizzying change less threatening to union members, seniors, and minorities--while still luring baby boomers and suburbanites with the banner of opportunity.

The result is one of those policy grafts for which Clinton is famous. Although he still couches his economic vision in terms of optimism, security will be an important motif in the President's State of the Union message on Jan. 25. When he speaks to Congress and the nation, Clinton will signal a shift from the gritty business of deficit-cutting to the more palatable task of investing in "human capital."

SHOOTING SPREES. The apostle of change has designed the security blanket around a massive new middle-class entitlement: legislation, drafted last year, that would guarantee all Americans lifetime health care. Expanding from there, Clinton stitches together a host of federal programs into a patchwork quilt. The package includes a system of continuous learning and retraining, a government drive to promote new high-tech industries at home while prying open markets abroad, even a "personal security" plan promising to protect citizens from gun-toting thugs.

The anticrime measures were woven into the security fabric only recently, spurred on by public horror over a string of violent shootings and kidnappings. Mostly, Clinton's programs try to boost an economy he feels is still growing below potential. Clintonomics I dealt with curbing a recession-swollen deficit. Clintonomics II aims to lock in the expansion by bombarding a host of "structural" problems with targeted injections of federal cash.

"Targeted" is the key; it's Demospeak for "small." Firm caps on spending mean that little new money is available. So Clinton may shift up to $15 billion a year into a new "investment budget." The transfer would dig into transit programs, community development block grants, low-income energy assistance, and other domestic programs. The cash would go to Head Start, elementary and secondary education grants, and college tuition aid. Meanwhile, the Labor Dept.'s training, vocational education, and apprenticeship system will be broadened and redesigned for more flexibility. Says National Economic Council chief Robert E. Rubin: "We're putting in place a strategy to get the economy on a track of long-term growth."

The prime mover behind the Administration's "investment" strategy is Labor Secretary Robert B. Reich (page 74). His idea of small-scale investment spending won support from Rubin, Treasury Secretary Lloyd M. Bentsen, and other moderates. Still, they fear that too much harping on the Reichian security theme will undercut Clinton's change message. "It sounds like we're going to protect everyone from ever being laid off," complains a senior White House official. "That's standpattism."

Clinton leans toward Reich's contention that unless workers feel the government is trying to halt the erosion in their earnings, they could lurch toward protectionism, nativism, or xenophobia. The battle over how much to promise is likely to rage until the last minute. "None of this is going to get sorted out until we all get in a room the night before the speech and turn it into a frat house scene full of screaming people," grins political adviser James Carville. "Clinton will choose his State of the Union framework as he drives up Pennsylvania Avenue on the 25th."

Regardless of how prominent the security concept is, business should not find the first installment menacing. Many of the Administration's ideas, such as upgrading vocational training, have echoed through boardrooms for years.

Longer-term, corporate leaders worry that what began as a small notion of The Secure Society will mushroom into something grander. "The big fear is that the push for security will drive up costs for health, pensions, and training," says Jerry J. Jasinowski, president of the National Association of Manufacturers. "Ultimately, that will create more pressure for reducing employment."

Clinton has tinkered with his blueprint to make it more business-friendly. With the exception of a regulation-heavy health plan that's widely disliked by small employers, he's playing it safe by concentrating on pilot projects. He also pairs the promise of a government cushion with the demand that aid recipients assume greater responsibility for their own actions. "Security's a nice word," muses Carville. "I prefer the idea of mutual obligation."

As they add the finishing touches to their plan, Clintonites are anxious to dispel the notion that their new security web will grow into a European-style safety net (page 78). Reich insists that it will function more like "a trampoline. We want a system that helps people with their own energy bounce back to where they were before."

That, critics charge, is precisely what's wrong with the whole conceit. "This is emblematic of paternalistic liberalism, which does not treat citizens as self-governing but as befuddled victims," scoffs GOP strategist William Kristol. Agrees Republican pollster Frank I. Luntz: "I hate it. It reminds me of pre-Thatcher Britain. But security is a strategic home run for Clinton."

Despite partisan sniping, Clinton is pushing ahead. Although final decisions await his return from Russia, here's how major components of Year Two's package are shaping up:

-- Health security. Whether the U.S. is in the throes of a health-care "crisis," as the President claims, is debatable. But there's no doubt that something fundamental is amiss. Some 38.5 million Americans lack health insurance, while others remain wedded to jobs they dislike for fear of losing benefits. Many small employers can't afford coverage. Worse, the U.S. spends far more on health care than other industrial nations.

To tackle these problems, the President and Hillary Rodham Clinton are prescribing their Big Fix. By 1997, they would cover all Americans with a standard benefits package. Large employers would have to pay 80% of the cost of insuring workers. Most Americans will buy coverage through regional purchasing syndicates that would bargain to keep costs down.

Opponents of the Clinton scheme focus on its optimistic funding assumptions, bureaucratic rigidities, and employer mandates. "This plan will be funded on the backs of small business, the job creators," fumes Jack Faris, president of the National Federation of Independent Business. Even some leading Democratic economists are worried. Says Lester C. Thurow of Massachusetts Institute of Technology's Sloan School of Management: "The Europeans have taught us that [mandated benefits] end up pricing labor out."

Thurow's fears could be overstated: The White House lacks the votes for anything as sweeping as "Hillarycare." The President will insist on movement toward universal coverage, but he will give ground on the employer premium share, benefits package, and other details.

--Skills security. To soothe Americans' angst over finding and keeping a good job, Clinton is pushing a Reichian plan that would overhaul federal education and training programs. Funding would rise for a Labor Dept. "school-to-work" scheme that targets up to $300 million to improve vocational education. Support for the Education Dept.'s Goals 2000 program, which aims to set up national education targets, would quadruple, from $105 million in 1994 to $422 million for fiscal 1995. Trouble is, Clinton seems joined at the hip to National Education Assn. lobbyists, which prevents him from backing tough standards. And Goals 2000 doesn't address what experts believe is a key problem: huge inequities between rich and poor school districts.

The big noise, naturally, will come out of Reich's shop. He'll unveil legislation to streamline Labor's employment system, eliminating separate programs to help workers hurt by foreign competition, a shrinking defense sector, or environmental regulations. Another pilot project will create "one-stop" reemployment centers where counselors would assess applicants' skills, look for leads from a national jobs data bank, or steer workers to the Job Corps and other training programs. But budget constraints will keep funding for Reich's training agenda and companion Education Dept. programs at around $2.5 billion to $3 billion next year.

Political prospects are enhanced by the program's broad focus. In the past, the government's training efforts centered on disadvantaged youth. The Administration is seeking to target aid to all workers in the belief that most employees will need constant training in the new inowledge economy. Experts agree. "I see change and insecurity as chronic," says Anthony Carnevale, chief economist for the American Society for Training & Development. "You need reemployment systems for all Americans."

Critics of Reich's plan span the left and the right. "The Administration is under terrible budget constraints it created by championing deficit reduction," complains Jeff Faux, president of the liberal Economic Policy Institute. Former Bush domestic aide James P. Pinkerton says the government spends $22 billion on dozens of programs and still can't match retrained workers with jobs. "Every training program without exception has been a failure," says Carnegie Mellon University economist Allan H. Meltzer. Still, in an election year, Congress is all but certain to pass the package.

-- Pension security. In 1992, corporate funding of retirement plans fell $53 billion short of projected needs, up from a $38 billion shortfall the previous year. That has led the Labor Dept. to seek legislation that will require companies to shore up pension plans and give workers early warning of financing problems.

Prodded by Senator Bill Bradley (D-N.J.), the White House is also weighing new measures to assure pension "portability." Bradley plans hearings on ways to ensure that workers who change jobs can take their pensions with them. Treasury's Bentsen likes the portability concept but is nervous about the cost of new pension mandates. The outlook: slow movement toward modest reforms, partly because the Senate Finance Committee is tied up handling health care.

-- Competitiveness policy. While most Clintonites won't utter the words "industrial policy," that's what they are practicing. Whether it will boost incomes and make people feel more secure in their careers is still unclear, however.

At home, the Administration is subsidizing advanced research that promises a commercial payoff. Already, the government has entered into a 10-year collaboration with the Big Three auto makers on new clean-car technologies and is studying ways to boost U.S. consumer-electronics manufacturers.

The White House is also developing a plan for a national information infrastructure. And funding for high-tech research is set to rise across the board. Clinton will ask Congress for a $480 million increase in the Commerce Dept.'s $3.6 billion budget. Half of that would go to the Advanced Technology Program, which awards research grants to companies developing new technologies. The new money would give ATP $451 million for 1995, up from $68 million in 1993. By backing technologies such as flat-panel displays, handwriting-recognition systems, and advanced computer memories, Clinton's techno-wonks hope to speed U.S. industry's efforts to gain a competitive advantage.

An additional $35 million would double funding for manufacturing extension centers, which are designed to give small and midsize companies access to new production methods. And the Commerce Dept.'s defense conversion program will get $60 million, on top of $80 million now, with most going to a swooning California. "The Administration is off to an outstanding start with technology policy," says George M.C. Fisher, CEO of Eastman Kodak Co. and former chairman of the U.S. Council on Competitiveness.

Clinton may get a bigger bang, however, from assertive export-promotion and market-opening measures. The White House has been butting heads with the government of Japanese Prime Minister Morihiro Hosokawa to gain "measurable" results on market access for a host of U.S. goods and services, from farm products to auto parts to insurance. Thus far, Japan hasn't budged much. The bottom line: The President's technology initiatives will find a warm welcome in Congress, but only years of constant battering will produce much in the way of measurable progress with Japan. No one knows if Clinton, whose international credo seems to be to speak loudly and carry no stick, is up to it.

nPersonal security. When the media began to focus on what was portrayed as an epidemic of violent crime, politicians' radar screens lit up. Clinton reacted more nimbly than many Republicans, who seemed complacent in the belief that Americans loved guns more than they hated crime. As a result, the Administration has put the GOP on the defensive with a bill that seeks to put 100,000 new cops on the beat and stiffen sentences for habitual offenders.

Clinton's preemptive strike on crime may be seen by some as political expediency. Indeed, according to surveys taken by GOP pollster Ed Goeas, fear of crime has become the No.1 source of public insecurity, picked by 28% of respondents. "The security of being able to walk down the street without someone hitting you over the head doesn't sound like an [unreasonable] entitlement to me," says Harvard University economist Benjamin Friedman.

There are doubts aplenty about the efficacy of Clinton's security blanket. And pollsters caution that he risks raising expectations too high. But as a political concept, the President's attempt to meld his disparate programs into a caring counterpoint to Reaganism can't be faulted.

To appreciate why, look at the angst Clinton's security offensive has caused in GOP ranks. "The thrust of this program is political," grouses Theodore Arrington, a Republican political scientist at the University of North Carolina at Charlotte. "It ties Reich's ideas, health care, and crime up into a nice little bow." Comments William McInturff, a Republican pollster: "Democrats have thrown everything they've got into the security issue. Someday this will boomerang when the public comes to associate it with more Big Government and bureaucracy."

"NO TESTOSTERONE." But in the meantime, says political analyst Kevin P. Phillips, Clinton's security strategy may position him well for his 1996 rendezvous with the voters--assuming the economy keeps moving upward. "When it comes to really stopping corporate downsizing or having a viable industrial policy, Clinton's security blanket gives a guy who's about to face the firing squad an alpaca coat," says Phillips. "With no ideas and no testosterone, Republicans are in no position to fight back."

Economically, however, Clinton's security offensive is less impressive--and could even be a drag on growth. Many of the education and training initiatives have been tried without much success. Violent crime, largely a local problem, has proven resistant to federal intervention. A massive new health-care entitlement could wind up costing the nation jobs. Clinton's industrial policy initiatives could produce some gains, but perhaps a few boondoggles as well.

Overall, the impact on America's $7 trillion economy is likely to be slight. For his part, Clinton can only hope that his State of the Union security blanket extends his stay in the Oval Office.

CLINTONOMICS II

Competitiveness in the world economy and economic security at home-that's Clinton's national vision. Some key elements of his plan to boost America's skill base while shielding people from the harshest side effects of international competition:

HEALTH SECURITY

-- Lifetime health insurance for all;

80% of workers' premiums paid by large

employers, not exceeding 7.9% of payroll

-- Big purchasing co-ops that bargain for the most economical care would serve most Americans

EDUCATION & TRAINING

-- "Lifetime reeducation" as a goal,

fostered by voluntary national education standards, more funds for public schools, and direct federal college loans

-- Improved vocational and apprenticeship programs for the noncollege-bound

-- Revamped employment programs to help workers cope with rapid job market changes

PENSION SECURITY

-- Require employers to increase their contributions to ensure adequate funding of existing defined-benefit retirement plans

-- Encouragement of pension "portability" to give workers greater flexibility in changing jobs or careers

PERSONAL SAFETY

-- Mandated tough minimum sentences for violent criminals

-- Funds for "community-based" policing that will put 100,000 new officers on the streets

-- Stiff new license fees for gun dealers; possibly national registration for handgun owners

COMPETITIVENESS POLICY

-- More seed money to promote private development of promising technologies and to help manufacturers put the latest methods to work

-- Technical assistance and new financing to help small and midsize exporters sell to emerging overseas markets

-- Aggressive negotiations to open markets in Japan, China, Latin America, and elsewhere

DATA: BUSINESS WEEKPaul Magnusson and Owen Ullmann, with Lee Walczak and Susan B. Garland, in Washington, and with Christopher Farrell in New York


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