Clinton Would Prime The Pump With An Eyedropper

If President George Bush's economic record is as bad as Democrats claim, Presidential candidate Bill Clinton is guilty of fiddling while Rome burns. The meager economic plan he has proposed is dwarfed by the rhetoric used to describe the economy's ills. If the Democrats are right that we have the worst economy since the Great Depression, their remedy is woefully inadequate.

No matter how it is cut, Clintonomics is a picayune economic package. From the standpoint of traditional pump-priming, adding $20 billion annually in public works projects would not have a discernible effect on a $6 trillion economy in which the government already spends $1.5 trillion. The Bush Administration's transportation bill, which Congress passed, is actually larger than Clintons package, and it hasn't revived the economy.

Clinton's private-investment initiatives are even more pathetic. He proposes to make permanent the currenttemporary research and development tax credit, to give a tax credit for new investment, and to give companies a 50% capital-gains exclusion for new investment in plant and equipment. Whatever this package would do to lower the cost of capital and spur investment is more than wiped out by the proposed increase in personal income tax rates that would reduce the aftertax earnings on investment. Indeed, the money pumped in through Clinton's investment incentives is largely eaten up by increased fines and taxes for corporate polluters.

DEBT ILLUSIONS. If one looks to deficit reduction to spur the economy by releasing savings for private investment, the plan also disappoints. It proposes $220 billion in new spending and $150 billion in new taxes. The gap is filled with unspecified additional defense cuts, a freeze on hiring government consultants, a cut in congressional staff, beefed-up IRS enforcementeven a cut in price supports for honey. This barely qualifies as good smoke and mirrors budget art.

The overall impact of Clintonomics would be to reduce investment and employment and to spark capital flight. Employers already have numerous disincentives to hire, and Clinton would add two big ones under the names of universal access to health care and job retraining. The pay or play health care plan is a $30 billion tax on private business. The job retraining program is financed with a $38.5 billion payroll tax. Raising the cost of employment is not the way to create more jobs.

Clinton also plans new taxes on foreign investment that would leave the U.S. less integrated in the world economy. He proposes to repeal the tax deferral of foreign-source income. For example, a foreign subsidiary of an American multinational would find the reinvestment of its earnings abroad subject to U.S. income taxes. Clinton claims this would eliminate the tax subsidy for exporting jobs, but it would actually make the U.S. more of a debtor nation by reducing our foreign investments and future income from them.

WASTED ENERGY. Clintonomics also targets foreign investors in the U.S., such as the recently announced plans of the German carmaker BMW, to build a $635 million plant in South Carolina. Under Clinton's proposed transfer pricing rules, BMW's internal pricing would be regulated in order to increase the taxable income attributable to the U.S. plant. Running off foreign investors is not the way to raise U.S. productivity and taxable wages.

The Democratic platform calls for adding to this economically depressing brew a costly new clean-water act and a fine on those who waste energy. Just imagine the regulatory bureaucrats drawing up the definition of energy waste. Nothing would escapelong, hot showers, overcooked vegetables, even joyriding in cars. Increased fines from energy waste would become a permanent deficit-reduction item.

The day pension-fund managers and other investors conclude that the Democrats lengthy list of mandated costs precludes a rising stock market, they will shift more of their funds abroad. As more money leaves the country, the dollar will weaken, thus accelerating the trend. The implication of Clintonomics, therefore, is exchange controls, and since the dollar is the world's reserve currency, this implies a massive international crisis that would disrupt world trade in a way not experienced since the Great Depression.

Clinton's anticapitalist policy is rooted in his claim that during the 1980s, the wealthiest 1% of Americans got 70% of the gains. This erroneous assertion is based on dubious manipulations of dubious data that the Congressional Budget Office acknowledges is flawed and has dropped from the information that it supplies to Congress.

If Bush is as bad as Clinton says, the challenger owes us something better than a campaign based on a lie. Bush is vulnerable on the economic growth issue, and Clinton's decision to build his campaign around the fairness issue is an indication that his administration would implement a redistributive rather than a pro-growth economic policy. On the other hand, a Bush victory promises little more than a continuation of a stalled economy, as policymakers try to balance the budget while killing the economy with disincentives. In 1992, the economy does not have a candidate.

Before it's here, it's on the Bloomberg Terminal.