The overriding economic issue of the presidential campaign is whether Americans will, or should, tolerate several years of austerity in hopes of ushering in a new era of job growth and prosperity.
The legacy of huge budget deficits and a $4 trillion federal debt may not leave Americans much choice but to face up to continuing stagnation, many economists believe. Sooner or later, said Rudy Penner, a former director of the Congressional Budget Office, ”the piper must be paid.”
But in this presidential race, as in others, Americans do not like the sound or the meaning of the dreaded ”A” word. Austerity not only implies deeper budget retrenchment and possibly higher taxes, but continued erosion of the American standard of living and more job cutbacks.
To some analysts with darker fears, overly austere measures in the next few years could send the economy into a tailspin that would make millions more Americans dependent on the taxpayers, ultimately deepening the deficit.
Nearly four years of sluggishness, job cutbacks and anxiety about U.S. economic prospects finds the country impatient and frustrated with anything that smacks of sacrifice. For that reason, neither President Bush nor Arkansas Gov. Bill Clinton has provided details of his programs to reduce the deficit. ”The American people would probably defeat someone who came up with a truly fundamental, effective plan to get the deficit under control over the next six to seven years,” said Steve Bell, former chief staff member of the Senate Budget Committee.
Ross Perot has provided a specific plan, including a 50-cent gasoline tax and cutbacks in Social Security cost of living payments, but revealed it only after withdrawing in July. If he gets back in the race, his program`s toughness probably won`t be popular, but he may force Bush and Clinton to confront the deficit issue more directly.
Many economists fear the next president could easily overdo austerity with the economy so fragile. They said this was the mistake that Bush made in raising taxes in 1990, although he had good intentions. For all the criticism of the 1990 budget agreement, it should help reduce the deficit once the economy recovers.
”I don`t think Americans care about the deficit,” said John Silvia, economist for Kemper Financial Services in Chicago. ”Americans are voting for jobs. I think Americans in general want more inflation. There are a lot of people who made a bet on more inflation, and were disappointed when it declined. Now, they want the government to bail them out.”
No matter who is elected, though, the next president will face a tricky, complex task if he attempts to stimulate the economy in the short run to induce Americans to spend at a higher rate.
The problem is the bond market, a giant bazaar of billions of dollars with an attitude. At the slightest hint or the softest whisper of inflation with such a big deficit, this market drives up long-term interest rates so important to investment. This in turn affects mortgage rates and the value of the dollar.
Charles Schultze, former chief economic adviser to former President Jimmy Carter, said the next president must establish credibility with the bond traders in order for any economic stimulus program to be successful. To do so, any tax cut or increased spending must be seen as temporary, he said.
If Clinton is elected, Schultze said, ”one thing he might do is get his expenditure increase program and his tax increase enacted simultaneously, but delay the effective date of the tax increase.”
Stuart Eizenstat, former top domestic adviser to Carter, agreed. He said the next president`s economic plan must achieve ”a very exquisitely delicate balance” between deficit reduction, increased investment, and long-term economic vision. The times call for a short-term tax cut that could be turned off a year or two after going into effect, he said.
A number of liberal economists believe that the next president should go further and risk expanding the deficit dramatically in the short run to strengthen the recovery. More economic growth will in time yield new jobs, new tax revenue and an ultimate lowering of the deficit, they believe.
But such old-fashioned economics is held in low esteem in policy circles these days, even among Clinton advisers. Clinton would cut the deficit in half in his administration, although largely through reductions already mandated by the 1990 budget agreement and through optimistic economic projections.
He would raise $300 billion with a new tax on the wealthy and foreign corporations and with hefty defense cuts and other reductions. He would spend all but $80 billion of it rebuilding American infrastructure such as bridges and high-speed trains, retraining of workers, and other investment incentives. Bush, by contrast, would cut taxes by 1 percent across the board, slash capital gains taxes, and cut spending for every dollar provided in tax cuts, in effect shrinking the government. He also would provide dollar-for-dollar spending reductions for money earmarked by taxpayers on their income tax returns for debt reduction. He also wants to provide dollar-for-dollar spending reductions for money earmarked by taxpayers on their income tax returns for debt reduction. He promises a balanced budget.
He singles out defense and entitlements for the largest reductions, but has exempted Social Security from any cuts. To Bush, easing the government`s demand for private capital and lowering taxes on profits from the sale of stocks, bonds and real estate would create jobs.
Bush echoes economists who believe that a president can`t drive the economy higher for a sustained period with fiscal policy, or the government`s power to manipulate the economy through tax or spending decisions. Such efforts are the prime reason for today`s deficits, they believe.
Marvin Kosters, economist at the American Enterprise Institute nominated by Bush to head the Bureau of Labor Statistics, said: ”I don`t think that fiscal policy is all that important. The role of monetary policy (the power of the Federal Reserve Bank to control the supply of money and the level of interest rates) is more significant. A president`s role in that regard is important, but never immediate. His appointments to the Federal Reserve Board can make a significant difference over time.”
The central bank, responsible for supplying new money to the economy to finance its growing transactions, will play an important role in the next administration. Under Alan Greenspan, the Fed has been criticized for being too slow and cautious in lowering interest rates during the four years of the Bush administration.
Kosters, for example, believes that ”monetary stringency” is the chief reason why the economy is so weak now and Bush is in so much trouble. Yet it was Bush who reappointed Greenspan to a new four-year term, a decision he may now regret.
Greenspan showed his independence from the administration recently when he canceled a weekly breakfast meeting with Treasury Secretary Nicholas Brady. The Fed chief was said to have grown weary of Brady`s relentless pressure to cut interest rates.
The Los Angeles Times reported recently that the administration thought that it had a deal with Greenspan that he would guarantee 3 percent economic growth if he was reappointed. The independent central bank denies there was such a deal, and doubted that Greenspan would be able to deliver even if he had promised.
”Does Clinton call for Greenspan`s resignation if he is elected?”
Silvia asked. ”That`s the real issue. If Clinton presents a program that is heavy on government spending and stimulus and appoints a new Fed chairman who the market might think is too easy on inflation, the bond market is going to go crazy.”
Penner, who served in Republican administrations in various economic positions, likes the Perot plan for its simplicity and broad sweep of sacrifice. Although some fear it could trigger a deflationary crisis that would throw more people out of work, he said that this ignores a key fact: The Perot plan wouldn`t take full effect until 1994.
In addition, said Roger Brinner of DRI/McGraw Hill in Lexington, Mass., the Perot plan would trigger a positive reaction in bond markets and cause the Federal Reserve to relax its reins on monetary policy. This conclusion is based on computer simulations of all three plans.
By 1996, Brinner said, the Perot plan would yield a stronger economy than the plans proposed by Clinton or Bush, assuming the central bank eased the money supply. In the interim, the Perot plan would impose more austerity on Americans.
Are Americans ready for the ”no pain, no gain” approach? The polls indicate they want the gain, but not the pain of deficit reduction. ”It`s a sad commentary on the American political scene and to some extent on the American public,” Eizenstat said.
