June 11 (Bloomberg) -- Business executive and Democratic donor Bernard Schwartz is taking on former Clinton administration Treasury Secretary Robert Rubin in a battle over whether the party's top budget priority should be to cut the deficit or spend more.

In public forums and private meetings with top Democrats, Schwartz, a former chief executive officer of Loral Space & Communications Inc., is challenging a central tenet of Rubinomics: that eliminating the deficit should be the No. 1 goal of budget policy. Instead, he argues that growth will come by tackling the ``deficit in public investment'' through stepped-up government spending on everything from roads to broadband.

``Our infrastructure is beginning to show wear and tear,'' said Schwartz, 81, who has contributed $4.7 million to Democratic campaigns and causes since 1993, according to the Center for Responsive Politics, a Washington-based research group. ``We can afford to fix some of our problems without being burdened by having to balance the budget first.''

The debate may determine the Democrats' future fiscal strategy at a time when they are favored to win the presidency in 2008, according to contracts traded on Intrade, an online electronic exchange based in Dublin.

Schwartz is beginning to have an impact. New York Senator Hillary Clinton, 59, who is leading in most opinion polls to be the party's nominee for president and is a longtime friend of Schwartz's, rolled out a nine-point ``innovation agenda'' on May 31 that included increased support for broadband. Advisers to the campaign said Schwartz, who is backing Clinton, has influenced her thinking on the importance of infrastructure investment, though she still also supports balancing the budget.

Dodd's Support

Another Democratic presidential candidate, Senate Banking Committee Chairman Christopher Dodd, 63, also backs more investment and is considering introducing a bill that would establish a government fund to finance such spending.

His counterpart in the House, Representative Barney Frank of Massachusetts, 67, held a hearing on public investment at the House Financial Services Committee on March 23, where he spoke of its importance.

``The debate over the deficit is just now being reopened,'' said Robert Reich, 60, who served as labor secretary under President Bill Clinton and is now a professor of public policy at the University of California at Berkeley. ``When the economy slows, as I expect it will over the next year, the Democrats will begin thinking even more about this.''

Spending for Growth

Schwartz argues in a soon-to-be published paper that the Democrats' focus on cutting the deficit may be counter- productive because it hinders the government from spending money on projects that will spur economic growth and help the middle class.

The American Society for Civil Engineers has estimated that $1.6 trillion is needed over the next five years to improve the nation's roads, dams, airports and other public facilities.

According to Schwartz, the government can afford the extra outlays. At 1.9 percent of gross domestic product in 2006, the federal budget deficit was well below the 2.3 percent average of the past 20 years, he wrote.

And that's been easily financed, thanks to a ``plentiful'' supply of savings from China and other Asian countries, he added in the paper he co-wrote with Sherle Schwenninger of the New America Foundation in Washington.

A `Deep Threat'

Rubin, 68, who is chairman of the executive committee at New York-based Citigroup Inc., the biggest U.S. bank, isn't as sanguine. He warned May 1 that the vast flows of capital from abroad were unlikely to be sustained. Budget deficits, U.S. household savings that the Commerce Department says shrank by $96 billion last year and record trade gaps pose a ``deep threat to our longer-term economic well-being,'' he told reporters at the Montana Economic Development Summit.

While saying that the U.S. needs to invest in education and health care, Rubin stressed the importance of reducing the deficit. ``We've got to get our fiscal house in order,'' he said.

Schwartz argued otherwise, first at a conference at the New School in New York on March 9, then at a May 11 gathering on Capitol Hill sponsored by the school and the New America Foundation. He is also scheduled to appear tomorrow on a panel on the issue organized by the publication Democracy: A Journal of Ideas.

Behind the Scenes

Schwartz, who is now chief executive officer of BLS Investments Inc., a New York-based private investment company, is also working behind the scenes to try to get his message across.

He met a host of senators, including Max Baucus of Montana, Byron Dorgan of North Dakota, Edward M. Kennedy of Massachusetts and Charles Schumer of New York, on Feb. 1 at a gathering of the Democratic Policy Committee. He will appear before that panel again on July 12, along with Felix Rohatyn, a senior adviser to Lehman Brothers Inc. and former ambassador to France in the Clinton administration.

``He's probably the most dedicated advocate of public investment that I know,'' said Rohatyn, 79, who has promoted that approach since the 1970s, when he headed up the Municipal Assistance Corp., which helped New York City out of a fiscal crisis by issuing debt to finance city spending programs.

Schwartz is ``a very well respected Democratic leader,'' said Robert Kerrey, a former Democratic senator from Nebraska who is now president of the New School university in New York. ``He's long been an advocate of investment and pro-growth policies.''

Clinton Backer

Schwartz has been a supporter of the Clintons since 1991. During Bill Clinton's administration, New York-based Loral, a satellite company, was investigated by the Justice Department over allegations that it illegally transferred missile-launch technology to China. The company agreed in 2002 to pay a $14 million fine without admitting or denying guilt. It emerged from bankruptcy in 2005.

Schwartz faces a tough task in changing Democrats' budget strategy. ``We're still a long way from catching on,'' he said.

President George W. Bush inherited a $128 billion surplus when he took office in 2001. Under the weight of tax cuts, recession and increased national-security spending after the Sept. 11 terror attacks, the budget swung to a $413 billion deficit in 2004, before narrowing to $248 billion in the fiscal year that ended Sept. 30.

`Fiscal Profligacy'

The Democrats took control of both houses of Congress this year for the first time since 1995 on a platform of fiscal prudence. ``It's a real contrast to the fiscal profligacy of the past few years,'' said Jason Furman, director of the Hamilton Project, a Washington-based group named after the first Treasury secretary and partly financed by Rubin. ``I don't think anyone wants to lose that.''

Schwartz said he often talks with Rubin and described their conversations as ``cordial.''

``If you ask him, there's not much difference between us,'' Schwartz said. ``That's because he's been winning the argument.''

He added that ``if you ask me, there is a difference.'' That difference ``is a question of timing, not objectives,'' he said. ``I'm afraid if we wait too long, we're going to miss the opportunity to increase investment.''

To contact the reporter on this story: Rich Miller in Washington at rmiller28@bloomberg.net

Last Updated: June 11, 2007 00:06 EDT