Clintonomics Has What It Takes For The Long Haul

Bill Clintons economic blueprint, "Putting People First: A National Economic Strategy for America," has won grudging praise for its specificity. But a number of commentators have faulted it for downplaying the federal deficit, for raising taxes on the wealthy, for increasing public investment, and for resisting calls to slash entitlements.

In my view, the proposal deserves praise, not condemnation, on all these counts. Economists of different persuasions tell three different stories about how deficits affect the economy. In the first story, shared by Brookings Institution moderates and Wall Street conservatives, large deficits are lethal for the economy because they drive up capital costs and crowd out productive private investment. The only trouble with this story is that the federal deficit is at a 30-year high, while short-term interest rates are at a 30-year low.

NEW FRAMEWORK. In the second story, the neo-Keynesian view, deficits are tolerable and even salutary, at least during recessions. The reason that big deficits don't raise interest rates during recessions is the presence of slack in the economy. A Mar. 30 open letter, signed by more than 100 distinguished economists organized by Yale's James Tobin and MIT's Robert M. Solow, argued for a recovery led by public and private investment, relying on investment tax credits and an increase in direct public outlay. "Since the economy has idle resources...and the threat of inflation is minimal, it is appropriate to let these expenditures add to the deficit, financed by borrowing...," it says.

Nonetheless, most neo-Keynesians believe that once a recovery comes and high employment is reached, high deficits do create competition for scarce capital. At that point, the economy would have to generate increased savings or it would pay the price in the form of higher interest rates, which would deter investment and choke off recovery.

Clinton tells a third story. He shares with the neo-Keynesians a refusal to be intimidated by the deficit. But unlike that of the neo-Keynesians, his view is not primarily a macroeconomic story at all. Rather, it is concerned mainly with structural factorshow effectively each part of the economy works, and how efficiently the pieces fit together. The Clinton blueprint emphasizes the quality of America's labor and capital, the potency of its technology, the state of its infrastructure, and sectoral inefficiencies such as health care.

In effect, Clinton's economic framework represents a turning away from macroeconomics. Thus, he proposes a program of lifetime learning and training to improve the quality of the work force; a $50 billion-a-year program of renewed public investment aimed at repairing decayed infrastructure and at stimulating advanced technologies; conversion of defense technology to commercial purposes; targeted tax incentives to promote private investment; and comprehensive health care reform.

Not surprisingly, this approach contrasts radically with the supply-side strategy of the past decade, which claimed that tax breaks for the wealthy would increase savings, investment, and growth. What is more surprising is that the Clinton program also breaks with many assumptions of the neo-Keynesian brain trust, which has advised Democratic candidates since John Kennedy. All of Clintons senior economics advisershuman-capital expert and business consultant Ira Magaziner, Harvard political economist Robert B. Reich, Occidental College planner and author Derek Shearer, and Robert J. Shapiro of the Progressive Policy Instituteare people who look at the economy structurally rather than in terms of macroeconomic factors, such as deficits. In the structural view, the real story is the quality of the nations physical and human capital, the organization of its corporations, and the way capital markets serve business enterprises. An economy with more efficient inputs will grow faster and cut the deficit.

PARALYSIS. What Clinton has done is to take back the growth issueand in a novel way that rejects both the supply-side view as well as the austerity view that sees future growth as requiring belt-tightening now. Thus, though Clinton is a centrist on social issues, his economic program is more in the Roosevelt-Truman-Kennedy tradition than those of his partys last three nominees.

Nonetheless, a Clinton Administration would be at risk in three distinct respects. If Clinton is elected, the usual suspects will clamor for influence. He will be warned that structuralists like Magaziner and Reich are not real economists and that Democrats must reassure money markets by appointing apostles of austerity. Furthermore, if inflation starts to rise and the stock market falters before January, many financial commentators will see anticipation of a Democratic Administration as the cause. That will only intensify the pressure on Clinton to embrace fiscal orthodoxy.

Clinton's program is primarily a long-term cure for long-term economic problems, not a quick fix. If we get a triple-dip recession, Clinton will have to be nimble indeed to deal with a short-term crisis without sacrificing his long-term vision. But that vision is astute, and despite the nay-saying, Clinton should hold his course.

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