Mr. Clinton's Lost Opportunity

Bill Clinton was elected President of the U.S. because he was smart enough to hang a sign reading, "It's the economy, stupid," in his campaign war room. The sign was a constant reminder of the deep desire for dramatic economic change felt by millions of Americans, angry at incomes that stagnated, jobs that disappeared, and a festering federal deficit that eroded the financial as well as moral core of the nation.

Pity that President Clinton doesn't have another sign, this one hanging in the White House, that says, "It's spending, stupid." For in his defining moment, his first State of the Union message, the bold action promised and anticipated by so many voters is barely visible. It's almost as if the New Democrat who warmed to smaller, entrepreneurial government and energizing private enterprise has been kidnapped by a tax-and-spend Old Democrat, afraid of cutting entitlements and subsidies yet willing enough to raise taxes to pay for them.

CREDIT WHERE IT'S DUE. Traces of the New Democrat can be seen in Clinton's willingness to meet the deficit head on, declare it truly evil, and attempt to do something about it. In effect, he's telling America that tax-and-spend policies are better than the borrow-and-spend tactics that quadrupled the national debt in the Reagan-Bush years. He seems determined to undo the excesses of the 1980s. Credit must also go to his honesty and willingness to use realistic, even conservative, economic growth assumptions in his program. He is not hiding behind phony Gramm-Rudman laws or a pie-in-the-sky Constitutional Amendment on a balanced budget. And he is facing up to the need for higher social security taxes and an energy tax, although a gasoline tax would have been a less inflationary alternative.

Yet the State of the Union message remains a lost opportunity. It could have been a moment when President Clinton urged middle-class Americans to face the fact that the nation's huge deficit was a mirror image of their own enormous entitlements. He could have argued that the best way to cut the deficit was to cut these entitlements and root out subsidies to individuals and corporations. Given the heavy voting against the Republican incumbent, in favor of Ross Perot and the Democrats, Clinton had the momentum of change behind him, and he could have squeezed a lot more government spending. Yes, much spending is necessary--from Head Start to health research. But subsidies to the upper middle class and to the rich could have been eliminated by applying a means test to many government programs. Only the needy should apply.

In the clutch, afraid to antagonize the middle class and his party's own special interests, he flinched. Look at the suggested cuts in spending in the proposed budget. Of the thousands and thousands of government programs, the Clinton Administration could find only 12 that could be killed outright. The space station, which should have been canceled, is merely trimmed back, while the Supercollider, another piece of Big Science pork, continues to receive megabucks. Subsidies to the mohair growers continue. Subsidies to ranchers feeding cattle on government land continue. Subsidies to the well-off for child care and pensions continue. The list is practically endless.

The simple fact is that if you deflect the course of government spending downward, you have a much better chance of cutting the deficit than you do by raising taxes. By deciding on taxes rather than spending cuts, the whole New Democrat concept of reinventing government, of making the delivery of government services more efficient, goes out the window. So anemic are the spending cuts described in the State of the Union message that the question arises as to who mugged the Clinton Administration's deficit hawks in the behind-the-scenes battle over the program? At Budget Director Leon E. Panetta's confirmation hearing, he promised to cut $2 from spending for every dollar in tax hikes. That 2-to-1 ratio was sliced in half in the subsequent wrangling so that in the proposed budget, only $1 of government spending is being cut for each dollar in added taxes. And even that figure is questionable.

The Clinton economic program calls for $237 billion in net spending cuts and $245 billion in net new taxes over five years. However, if Social Security changes are counted as tax increases, as they should be, $21 billion in taxes get shifted across the ledger. That gives a net of only $216 billion in spending cuts, while tax hikes amount to $266 billion, eroding the ratio to a mere 0.81 to 1.

SHAKY POSITION. The Clinton Administration has put itself in a miserable bargaining position with Congress by not sticking to a 2-to-1 ratio. Given its past propensity to spend, Congress is almost certain to worsen the ratio. If so, the bond markets may tank, sending interest rates higher, threatening the recovery.

The stock markets are already spooked by the second- largest tax hike in American history. The worry is that $245 billion in new taxes may prove to be too burdensome for fast economic growth. In fact, the reliance on higher taxes rather than spending cuts might undermine the highly touted $31 billion short-term stimulus package. That the higher tax rates don't phase in until 1994 doesn't reduce this risk. Companies and investors who know they will have to pay a higher rate of taxation in the future can respond quite quickly to a fall in the returns they expect from their long-term investment.

While many large corporations will benefit from the two-year Investment Tax Credit, they face many added burdens under the Clinton plan. Higher corporate and energy taxes, plus a growing burden of government mandates and regulations, is placing a heavier load on most companies in the years ahead, making job creation more difficult.

President Clinton still has a chance to redeem his New Democratic self. This is at least a start toward reducing the deficit. It must be followed by a serious effort to do for the federal government what hard times have forced on the rest of America. A serious effort to streamline the federal government is a critical element in any program of long-term deficit reduction.

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