All new Presidents enjoy a period of goodwill to push through important legislation. As President-elect Bill Clinton takes office, he has two paramount tasks that he must address if he is going to repair the ailing U.S. economy. Clinton has the backing of most Americans as he tackles the long-term structural problems that have hurt the U.S. economy. He must take advantage of that goodwill to push through his long-term economic plan while cutting the budget deficit.
So what should Clinton do? He ought to concentrate on his long-term agenda for the economy. That means investment incentives for capital formation, including an investment tax credit and capital-gains relief for new and small businesses. It means investments in human capital, including education, training, apprenticeship programs, and reform of federal aid to higher education. It means improving America's infrastructure and health-care reform. To his credit, Clinton has said what his long-term prescriptions are likely to be.
The other priority must be credible deficit reduction. And here, Clinton's performance to date has been much less reassuring. Clinton now says he wants to cut the budget deficit by $145 billion over four years--that is, the deficit would be $145 billion lower in fiscal year 1997 than the current Bush projection of $305 billion. That's an acceptable goal. The problem is that there is no sign as yet of how the Administration will cut spending and increase revenues. To attain the kind of cuts needed, there must be a drastic reduction in the growth rate of entitlements, with the most obvious candidate being health services. On the revenue side, consumption taxes make the most sense. In addition to increasing the federal gasoline tax yearly by 10 a gallon for five years, the U.S. is going to have to adopt some sort of broad-based consumption tax, like a value-added tax.
To get the maximum downward pressure on long-term interest rates, budget cuts must be ironclad and written into law, not some vague promise or nonbinding principle such as Gramm-Rudman. As one Federal Reserve governor has said: "You've got to have a statutorily unambiguous, program-by-program package." Without major deficit reduction, massive federal debt will continue to drain the nation's private savings, crowd out private-sector investment, and frustrate America's hopes for economic recovery.