You wonder whether Clinton and his advisers have any sense of history. The president wants to be seen focusing “like a laser” on the economy, and maybe a stimulus plan conveys the desired image. But it’s a bad idea for four reasons: (1) it isn’t needed; (2) even if it were, it might not work; (3) if it does work-or is seen by the public to work-it would create a bad precedent for future policy, and (4) it distracts from what should be Clinton’s main focus, reducing the budget deficit. Let’s take the arguments one by one.
The economy is much stronger than most commentators expected. Since June, output (gross domestic product) has risen at a 3.6 percent annual rate. Lower interest rates pushed up housing starts 19 percent in 1992 to 1.2 million units. Existing-home sales in December (at an annual rate of 4 million units) were the highest since 1979. Consumers are more confident, because they’ve repaid debts and because layoffs-despite some well-publicized job cuts-have dropped. Between July and December, initial weekly unemployment claims declined 21 percent. As companies became more profitable, they increased equipment investment by 7 percent in 1992. These strengths should offset possible weakness in exports and defense spending. Most economists expect growth of 3 percent in 1993, which would be much higher than in either Germany or Japan. In fact, U.S. growth could go as high as 4 percent, says Lawrence Kudlow of the investment banking firm Bear, Stearns.
Economist David Wyss of DRI/McGrawHill, a forecasting firm, estimates that a $20 billion stimulus program might create 400,000 to 500,000 jobs by the end of 1994. The extra increase in GDP would be about 0.5 percent. He doesn’t see much impact until late 1993, because Congress probably wouldn’t enact a plan before late spring. But any benefits could be entirely offset, Wyss reckons, if long-term interest rates rose by 0.3 percentage points (say, from 8 to 8.3 percent for mortgages). That would hurt housing and investment. Interest rates would rise if investors decided that Clinton’s policies–everything from the budget to his promise to index the minimum wage to inflation-have an inflationary bias.
If the economy grows strongly, people might assume (even if they’re incorrect) that the stimulus is the reason. With high unemployment (7.1 percent in January) and low factory utilization (79.3 percent in December), a little extra spending now shouldn’t quickly raise inflation. But at most, a temporary stimulus has only a temporary effect on the economy; the effect stops when the new spending or tax cuts stop. The danger is that, whenever the economy slows in the future, Congress and the president would be tempted to repeat the exercise by increasing spending or cutting taxes. This sort of fine-tuning in the 1960s and 1970s-when reinforced by easy credit policies from the Federal Reserve-raised inflation. If the Fed doesn’t cooperate, the main result is a higher budget deficit. And three decades of deficits haven’t improved the economy’s long-term growth rate.
Folks, it’s hard to trim the budget deficit if every sign of economic weakness serves as an excuse to raise the deficit. The federal budget exists to define and pay for the tasks of government. It’s too cumbersome to be used aggressively to control the business cycle. The mixing of these two roles-the budget as an expression of government and the budget as a tool of economic management-has consistently confounded public understanding. Government can’t easily influence business cycles, but its main tool for doing so ought to be monetary policy (the Federal Reserve’s policies). Indeed, the Fed could cushion any depressing effects on the economy of the spending cuts or tax increases needed to reduce the deficit. In a $6 trillion economy, though, these are likely to be modest.
By marrying “economic stimulus” and “deficit reduction,” the president creates a monumental public-relations task of trying to explain what cannot easily be explained. If a bigger deficit is OK for 1993 why not for 1994 or 1995? Presumably, the president will argue that the faster economic growth generated by the stimulus will make disagreeable deficit reduction more palatable.
This political logic is less compelling than it seems. The winners from stimulus and the losers from deficit reduction aren’t necessarily the same people. Highway workers might benefit, while defense workers might lose. Defense workers probably won’t be mollified. There are practical problems, too. Any stimulus ought to be enacted quickly. Yet, this will be hard if it’s tied to passage of a controversial deficit-cutting plan. But separating the two might undermine the credibility of the president’s promise to control the deficit.
Curiously, Clinton has created this problem since the election. A stimulus package was not a big part of his campaign. The more the economic statistics improved-and the less the need for a stimulus-the more he committed himself to it. This may be a lapse in judgment or an effort to claim political credit for a recovery that was happening anyway. The usual justification is that the recovery isn’t producing job growth. But it is, though grudgingly. The government has two regular employment surveys. Despite cuts at companies like IBM, one survey shows job growth of 1 million and the other 742,000 in the past year. The unemployment rate has dropped from a recent high of 7.7 percent in June. Steady economic growth combined with slow job growth is raising productivity (output per hour), the source of higher living standards. It increased 2.8 percent last year, the most since 1976.
The White House says that no “final” decisions have been made. If so, Clinton could still decide (and should) to leave fine-tuning where it belongs: on history’s scrapheap.
