President Clinton’s economic plan is generally a winner. It charts a basically new direction in which the federal government will work actively to lift the economy out of its lingering doldrums and to promote long-term growth.
The politicians and pundits paw over the tax increases-the bulk of which are for the very rich-and the spending cuts to reduce the deficit. Neither of these will help the economy in the short run, unless the decline in long-term interest rates they generate has a much greater effect in stimulating investment than declines have had so far. And despite all the loud noise about cutting spending rather than raising taxes, their effects are about the same. Both, in themselves, slow the economy by reducing purchasing power and costing jobs. Even the long-run benefits of drastic deficit reduction may be more dubious than many believe.
All that, though, should not be the big story. The most important part of the Clinton program is what he talked most about in his campaign-investing in people, and public and private investment in America’s future. Tick these off:
– Funding for expansion of Head Start and Women, Infants and Children’s Care.
– 500,000 summer jobs for youth, along with remedial education.
– Training and jobs for those on “welfare.”
– New financing for higher education that encourages national service to meet our public needs and prevents the middle class from being saddled with debts out of proportion to their incomes.
– An apprentice program that will begin to meet the enormous challenge of ensuring that all Americans are trained and qualified for well-paying jobs in a technologically advanced, competitive world.
– More funds for education generally and for educational change.
– More police on the beat so that it is safe for business to operate, for workers to work, for children to go to school, and for all of us to walk the streets.
– Jobs repairing our roads and bridges, improving our airports.
– Moving our massive military research programs to civilian research and support of the technologies of the future.
– Stimulus for increases in investment by all firms in 1993 and 1994 to promote a sound recovery and continuing, permanent support for investment by small firms.
– A health care system that provides quality care for all at reasonable cost.
These are the things that count. And the program would be implemented in ways that are essentially fair.
Income taxes for families will rise only for those with taxable income over $140,000 or adjusted gross income over $180,000. The proposed tax increase on large corporations is only 2 percentage points; good or bad, that is hardly a big deal. The new energy taxes are modest and offset for those of modest incomes by increases in the earned income credit and other benefits.
The cuts in spending will fall largely, although far from entirely, on defense; but those cuts in the military are surely overdue in our changed international situation. And many of the other cuts and additional user fees are worthwhile economies or justly make people pay for what they are getting from government.
All that said, I have some reservations.
First, what is the justice in a double whammy for those on Social Security? It is said that all must sacrifice. But the really rich elderly will pay more in taxes along with all of the other really rich. Why have an additional tax on the admittedly only 20 percent of those on Social Security whose incomes are merely “middle”-$32,000 for couples and $25,000 for the large numbers of elderly widows?
The added tax on Social Security earnings, in a curious, perhaps unforeseen way, has the fault of further discouraging work by the elderly. Suppose a couple has an income (including half of Social Security earnings) of $32,000. If one of them undertook to work or continue working the federal income tax on those additional earnings would in effect be much higher than the 28 percent indicated for those in their tax bracket.
For each additional dollar of income outside of Social Security, 85 cents more of Social Security earnings, instead of the current 50 cents, would be taxed. The effective tax rate would therefore now be 1.85 times 28 percent, or 51.8 percent, for income taxes alone; it is currently bad enough, at 42 percent. Adding Social Security taxes, Medicare taxes and, in Illinois at least, state income taxes, brings the total net tax on each added dollar of income to over 61 cents! That is neither fair, nor good economics.
The proposed freeze in federal employees’ salaries undoubtedly has great political appeal, but is it fair to single them out, and is it even good economics? In our society we tend to get what we pay for. If we hold down federal salaries will not the best government workers tend to leave for better jobs elsewhere and leave us with a less efficient, and hence more costly public service?
And the higher marginal tax rates on the rich, rising to 39.6 percent in the interest of fairness, may prove a mixed blessing. They may be expected to generate greater reliance on tax shelters, particularly since the capital-gains rate will remain at a lower 28 percent and passive-loss rules for offsetting income in such shelters may be relaxed. This means that the government may collect less additional revenue from the higher rates. The perhaps curiously beneficial result may be to stimulate more building of new homes or whatever else the tax shelters go to finance.
My biggest concern, though, is with what sounds good to so many-all that deficit reduction. A Gallup Poll asked, “Which is more important, creating jobs or cutting the deficit?” Interestingly, despite the drumbeat of concern for the deficit, 65 percent of respondents said creating jobs is more important; only 28 percent chose deficit reduction.
Deficit reduction by tax increases or by cuts in spending kills jobs. If the government spends less, the government is buying less and that means fewer jobs for those producing what the government buys. If taxes are raised-or benefits cut-the public has less purchasing power and that means fewer jobs for those who produce what all of us buy.
President Clinton took the worst-case, slow-economic-growth scenario in projecting future deficits. His program, he said, would reduce the deficit some $140 billion in 1997 to a figure of $206.5 billion. That, as a proportion of our gross domestic product, would be some half of what it is now.
But the last estimates of President Bush’s Office of Management and Budget also presented a “high-growth” scenario that would bring the deficit down to almost exactly the same level-$207 billion-without these new taxes and expenditure cuts. Each 1 percentage point reduction in unemployment reduces the deficit by some $50 billion in the short run and even more in the long run. Lower unemployment and faster economic growth are the right way and the one sure way to reduce the deficit. Attempts to reduce the deficit by holding down public and private investment in current jobs and future productivity may even so slow the economy that the deficit actually goes up, as it did under George Bush.
We can use more stimulus to create jobs and investment and less in the way of direct deficit reduction. We should not cut government spending so much overall but rather cut the waste and shift the spending to more useful, productive investment.
Still, all in all, the Clinton program is a major new effort in the right direction, enlisting government in laying the foundations for a stronger economy, for us and our children.
