Economists' Advice On Reducing Deficit

ROSS PEROT didn't win the election. But his campaign did accomplish one thing: Bill Clinton will be under strong pressure to cut the federal budget deficit.

So the president-elect probably won't take the advice of Robert Eisner, a Northeastern University economist. "Concentrate on getting the economy in good shape and let the deficit take care of itself. The deficit is not really that large," he says.

The strategy offered by economist Charles Schultze is likely to get more attention. Mr. Schultze, who was budget director for President Johnson, says Clinton should in January simultaneously (1) launch a program to stimulate the economy even if that temporarily boosts the budget deficit and (2) propose legislation to cut the deficit in the future, perhaps starting in July 1994.

"Put it into law now so it is not just promises," says Mr. Schultze, now with the Brookings Institution. This, he maintains, would reassure the bond market that the new administration is not ignoring the deficit problem. The goal would be to prevent an increase in long-term interest rates.

Schultze would like to see Congress quickly give business a temporary investment tax credit to encourage new investments. He talks of a 15 percent credit the first year, dropping to 10 percent the next year, and 5 percent the third year.

Two economics professors from the Massachusetts Institute of Technology, Stanley Fischer and Clinton adviser Rudiger Dornbusch, agree on that basic strategy but differ in details.

Mr. Fischer says the federal government should also give, say, $20 billion to state and local governments for infrastructure projects, since Washington would take too long to crank up its own infrastructure program.

Mr. Dornbusch, a Clinton advisor, calculates that $40 billion in federal stimulus is enough to get the economy growing at a real 3.5 percent annual rate. "Anything more is adventurous," he says. "Anything less is too little to assure the economy will move forward."

On the deficit-reduction side, Schultze figures the Clinton program of taxes on the rich and on foreign corporations would not produce sufficient revenues. So he suggests that Congress also introduce a value-added tax (VAT) on consumption, similar to those in Western Europe, and devote the revenues to government health-care costs. He also approves of an energy tax.

Fischer suggests that both the VAT and the gasoline tax be phased in - perhaps in the case of the fuel tax, 5 cents in 1993 and 10 cents more in 1994 and again in 1995. "We have unbelievably low gas prices by international standards," he says.

Herbert Stein, who was a top economic adviser for President Nixon, says Clinton doesn't need to pump up the economy with tax cuts or extra spending. "The economy is rising slowly," he says. "It is not his recession. This is Bush's recession."

He does, however, urge Clinton to see Alan Greenspan, chairman of the Federal Reserve Board, soon to see how much economic growth the Fed will finance through expansion of the nation's money supply. If there is a major disagreement - say Clinton wants 4 percent real growth to reduce unemployment and ease the deficit problem and Greenspan only 2 percent in order to achieve zero inflation - then the president may need to go public and raise the issue in Congress. "But he should be sure [the disagreement] i s serious," Mr. Stein notes.

Stein also advocates direct measures to trim the deficit: reducing the medical care covered by Medicare and taxing Social Security benefits, for example.

After noting that the fiscal 1992 deficit came in at $290 billion (far less than the $399 billion projected in the original budget), Mr. Eisner argues that $80 billion of this deficit was due to the recession, that inflation will reduce the real value of the $3 trillion in federal publicly held debt by $90 billion, and that federal "investment" should be counted separately from operating expenses. "A $210 billion deficit is essentially in balance," he says.

Stein and Schultze, however, hold that big government deficits mean less capital is available for private investment.

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.