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What Clinton Can Do for the Economy

How a young candidate could fix the financial crisis

Bill ClintonBill Clinton

Bill Clinton in 1992.

Cynthia Johnson/Liaison

If nature cooperates, the inauguration of a new president can provide a sunny moment of inspiration for the republic. But when –– and if –– Bill Clinton takes the oath of office in January, he will face the darkening skies of economic distress.

No one can confidently predict how President Clinton would respond to such circumstances. He has articulated a long-term strategy for rebuilding the economy and reversing the deterioration of the Reagan-Bush era, but that plan will require many months of legislation and years of patient testing to produce tangible results. The economic crisis is not going to wait on Clinton’s new ideas.

Consumer spending is falling. So is manufacturing output. Real-estate developers, still swamped with empty office buildings, are defaulting on more loans. Bank lending to businesses continues to shrink, a stark indicator of the bleak prospects in commerce. With defense jobs evaporating, Southern California is a disaster area, and so is Connecticut. The European economies that buy U.S. exports are contracting, but so is Japan’s.

Conventional wisdom has also wilted. For the last eighteen months, government and private forecasters kept predicting an imminent revival of prosperity –– and kept postponing the due date. Now they’re beginning to admit their quandary. The stagnation of wages, jobs and production under Bush is not going to end conveniently for a new president named Clinton. And things may turn even worse. The global economy is flirting with a great unraveling –– the kind of critical moment that requires bold action from governments to stop the downward spiral before it turns into general destruction.

If Clinton is elected (as I fervently hope), his true mettle will be swiftly tested by these ominous conditions. Does he let the economic destruction play out, hoping it doesn’t get worse, and focus his energy on long-term remedies? Or does he launch immediate pump-priming measures on a scale that will put people back to work and create the market demand for increased production?

Clinton will be under enormous pressure from the governing elites, especially Wall Street, to ride out the storm without doing much of anything. Since these interests have contributed heavily in money and advisers to his campaign, he is bound to listen to their conservative counsel.

On the other hand, if Clinton wins, he will have been elected by the pain and financial insecurities of ordinary working people. His own future depends upon keeping his promises to them – promises to restore jobs and wages, not someday but soon. The honeymoon accorded this new president is likely to be quite brief.

“One of the things Clinton is going to face is the ghost of Jimmy Carter and the ghost of George Bush, too,” says Jeff Faux, president of the Economic Policy Institute, a liberal labor think tank. “Both of those guys will have been one-term presidents because both were done in by the economy and because, in different ways, they both followed the advice of Wall Street. The conventional wisdom screwed Carter, and it screwed Bush. Does Clinton want to be next?”

Put that way, it sounds like an easy enough choice, but Clinton is straddling the question because, naturally enough, he’s preoccupied with winning the election. In a sense, what we need in the White House at this very moment is an old-fashioned big spender. That’s the very label the Democratic challenger is trying to avoid.

In simple terms, the question facing President Clinton would be whether to authorize a temporary increase in the already bloated federal deficit in order to stimulate the economy. Given the $323 billion deficit he’ll inherit from Bush, the presumption is that Clinton can’t use the budget lever for stimulus and, indeed, must go to work right away in the opposite direction. In other words, impose the short-term pain of budget cuts or tax increases (or both) early in his presidency to restore fiscal order long term.

Deficit reduction would surely be the right strategy in certain times, but not now. For one thing, people have been counting on the government’s other main economic lever –– the money and credit policy set by the Federal Reserve –– to revive commerce, but it simply hasn’t worked. For two years the Fed has been hesitantly reducing interest rates from the historic highs of the Eighties, but each step has failed to produce the predicted results. Something stronger is pulling in the other direction, keeping consumers scared and managers cautious.

Now that short-term rates are down to around three percent, the central bank is running out of maneuvering room. The Fed can still cut rates a couple times more and probably will in the next few months. If that doesn’t kick-start the economy, then everyone is going to be staring into the abyss and asking: “Is this a depression or what?”

I usually avoid the d word in describing current conditions because it evokes the horrendous images from the Great Depression, when unemployment reached more than twenty-five percent and 10,000 banks failed. The present crisis is benign by comparison, but it is clearly driven by the same fundamental forces. The great bubble of debt built up in the Eighties is gradually collapsing, ruining debtors and spreading contractionary fears.

This time the general suffering has been limited mainly by the government programs enacted by Franklin Roosevelt’s New Deal –– Social Security, unemployment assistance, welfare, bank-deposit insurance and others. These programs are automatic stabilizers, pumping money into pocketbooks and forestalling the worst consequences of a deflationary collapse (at least so far). The present mire might be better understood as a small-d depression, but it is a still-dangerous swamp.

The German government, coping with the disorders of reunification, has greatly increased the risk of global depression, because the Bundesbank, the country’s central bank, has pushed interest rates through the roof. That’s depressing other European economies and destabilizing their currencies as well. The Japanese, on the other hand, seem to understand the present danger. Their bubble is collapsing, too, but Japan has launched an aggressive program to reverse the deflation –– $85 billion in new spending, with emergency assistance to real estate and banking.

The moment of maximum anxiety may well coincide with Clinton’s arrival in Washington. If, early next year, interest rates are approaching zero and the economy is still dead in the water, then what can he do? Most economists –– the ones who’ve been repeatedly wrong the last three years – are now predicting a revival by the middle of 1993. They would argue that Clinton shouldn’t do much except sit tight and blame it all on Bush. But if they’re wrong again, Clinton could find himself Hooverized by the continuing deterioration, just as Bush has been.

The elite debate on this question is splintered into roughly three different camps. The “strong medicine” position says Clinton must ignore current distress and hack away dramatically at the deficit. That means huge cuts in government spending, plus significant tax increases. Ross Perot embraced this line – after he bailed out of the race. It’s also being pushed with high-minded rhetoric by former Democratic candidate Paul Tsongas, retiring Republican senator Warren Rudman and Wall Street banker Pete Peterson. Their plan is essentially Herbert Hoover’s solution to depression. And as Hoover discovered, that’s a formula for a decade of austerity and suffering.

Clinton has already rejected it. In the spring his campaign argued the question –– austerity versus a middle-ground approach –– and chose the latter. Clinton would try to do two things at once: Promote growth by launching a $30 billion a year spending program for public-works projects while simultaneously chopping away at the deficit. He would raise taxes on the top income bracket and reduce spending in order to shrink the deficit by half within four years.

The problem with this approach is that, in the short term at least, it doesn’t really provide much stimulus. If the government simply shifts spending from one category to another and simultaneously offsets tax cuts for the middle class with increases on the wealthy, the net effect is a wash. Until recently, Clinton and his team assumed that would be sufficient; they, too, were counting on a revived economy by early next year.

The bad news is at least forcing them to reconsider the question and acknowledge a third possibility –– a liberal program of vigorous pump priming. This approach was articulated last spring by 100 economists (including six Nobel Prize winners), who called for emergency spending on roads, sewers and other public projects to create construction jobs and a positive ripple through the economy. The stagnation must be broken, they say, before it turns into something worse.

In their proposal, federal money would be distributed directly to state and local governments to avoid bureaucratic delays. More important, the new spending would not be offset by budget cuts. The plan is actually quite modest –– $50 billion –– and should be supplemented with other measures to stimulate housing construction, relieve failing debtors and prod the banks into more generous lending. If the United States and Japan were pulling in the same direction –– restarting the world economy –– they might be able to hammer the Germans into adopting the same policy.

The idea of consciously increasing the deficit is horrendous to orthodox thinkers. Clinton’s candidacy would not be helped –– at least among the elite –– by putting it forward, though it was the GOP economics of Ronald Reagan that created these awesome deficits. So Clinton ducks the question. When Tom Brokaw asked him bluntly if the bad news didn’t require a revision in his strategy, Clinton slid off the point without answering.

Gene Sperling, Clinton’s economic policy director, acknowledges the candidate’s predicament: “It’s a dilemma for a new Democratic president who comes into office with a stalled economy and the need to do something but, at the same time, is trying to send signals that he’s not a traditional Democrat and he’s willing to do fiscal discipline.”

Clinton’s advisers, Sperling says, are mulling over possibilities for accelerating spending if the economy remains weak but are not about to concede that their plans for deficit reduction are unrealistic. The hope, he says, is that an energetic new president with a credible strategy for restoring long-term investment will provide a psychological lift of his own.

It’s a fragile hope.

For the long term, Clinton does have a plan –– an array of new ideas that will end the laissez-faire drift of Reagan-Bush and make the federal government an activist agent in restoring the country’s economic base. After years of futile debate about the decline of manufacturing, a Clinton administration would confront the reality directly with a genuine industrial policy intended to regain the nation’s competitive edge.

“I don’t believe in government picking winners and losers,” Clinton told the Economic Club of Detroit, “but a government should do what it takes to help American business and American workers become winners. It isn’t any accident that twenty-eight percent of the Japanese work force and thirty-two percent of the German work force are in manufacturing and we are all the way down to sixteen percent.”

Among other things, Clinton has embraced an idea Reagan and Bush bad-mouthed – a civilian R&D agency that would force-feed the development of so-called “cutting edge” technologies, from robotics to biotech to fiber optics. He envisions the government’s investment capital leveraging private investment in high speed rail systems and advanced short-haul aircraft and a national information network and lots of other projects. For two generations during the Cold War, the government provided R&D capital to private industry through the defense budget, mostly to build fancy weapons. That era is over, and unlike Bush, Clinton recognizes that something has to replace it.

Clinton intends to put real money on the table for such ventures, but he will be constrained by the debt hole that Reagan and Bush have dug. Spending $220 billion over four years on education, public infrastructure and industrial innovation sounds like a lot of money, but it’s a mere trickle in a $6 trillion economy. Clinton’s strategy includes an assortment of tax breaks for business, too –– with the usual pitfalls associated with such tax loopholes. Simultaneously, he promises to cut off the largesse for foreign-owned firms that operate here but pay little in U.S. taxes and for U.S. companies exporting jobs.

The great weakness in Clinton’s long-term plan is that he is as yet unwilling to confront the global economy head-on and challenge the existing terms of trade by which the country is losing both jobs and sovereign control over its destiny. Clinton has backed off somewhat from his earlier endorsement of Bush’s free-trade agreement with Mexico, but it is not clear he’s prepared to force its renegotiation. That’s what it would take to get a treaty that deals honestly with wage differentials, environmental damage, taxation, labor rights and other fundamental issues.

Like most other middle-of-the-road politicians, Clinton is pinning his hopes for economic revival on reforming education – raising the level of skills and technological sophistication of workers. Education is always a good investment, but it is not the answer to the deeper problem of declining wages. Ask any unemployed engineer or chemist or machinist.

What we will know about President Clinton by Inauguration Day is that he is smart and serious about public life and greatly skilled in the high art of politics. What we cannot really know is the depth of his vision. Certainly, his strange up-and-down road to the White House has revealed incredible tenacity. His performance as a candidate has also demonstrated an impressive capacity to absorb new information and react to it. His positions on many complex issues have evolved as he traveled the campaign trail and listened to other voices. Those are qualities citizens should hope for in their leader.

Still, until he is in the job, we cannot really know whether Clinton is up to the awesome dimensions of the office. Some sense that this talented guy who grew up poor in the sticks of Arkansas is a little bit in awe of the important personages from Wall Street and Washington now gathering around him. The fear is that he will defer to their supposed expertise on large matters like the economy and follow their advice instead of his own instincts.

Others suspect, more cynically, that Clinton will follow Reagan’s lead and let the economy keep deteriorating in the first year or two of his term, assuming that growth and good feelings can be restored just in time for reelection in 1996. Certainly lots of advisers will be whispering that in his ear –– the same advice they gave to George Bush four years ago.

The other side of Clinton, however, is a politician who has risen quite far by keeping his eyes open and experimenting with new ideas and gambling on his own ability to figure things out and adjust his game to new realities. That is the side we should all hope will prevail if Clinton gets to the White House. The model, as Clinton himself likes to point out, is FDR, who governed shrewdly through the last crisis of this order. “The genius and the greatness of America,” Clinton says often, “is that in crucial times in our history, we have been able to reinvent ourselves.”

Then he quotes Roosevelt on governing amid economic turmoil. “The country needs and, unless I mistake its temper, the country demands bold, persistent experimentation,” Roosevelt said. “It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something.”

If Clinton governs boldly by that maxim, the country can, indeed, reinvent itself.

In This Article: Bill Clinton, Coverwall


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