Well-Made Policy vs. Hard-Won Consensus
AMONG press pundits and economic analysts, there's a broad consensus on what the Clinton administration should do in January: if needed, stimulate the economy modestly; lock in deficit-reduction measures; and tackle the long-term slump in productivity.
But Van Doorn Ooms isn't sure that consensus exists among politicians. "The politics of deficit reduction are very difficult," says the former chief economist of the House Budget Committee.
Dr. Ooms is director of research at the Committee for Economic Development (CED), a nonpartisan economic policy group of more than 200 business leaders plus two or three dozen university presidents and other educators. The list is impressive.
The CED has just joined the consensus in a report released today saying that fiscal stimulus measures should be limited to those compatible with raising long-term growth.
"We cannot emphasize too strongly our conviction that raising long-term growth must be the nation's top priority," states the report. Slow economic growth for the past 20 years has depressed wages in the United States, eroded living standards, hindered government services, and diminished the United States's ability to compete abroad.
To highlight that point, the report notes that the recent recession cost the nation roughly $220 billion, or $875 per person, annually in lost production and income for several years. But the longer-term slowdown in productivity growth after 1973 costs $1.4 trillion, or $5,400 per person, every year. This cost will continue to increase after the recession is over if nothing is done, warns the report's author, a CED subcommittee headed by Josh Weston, chairman of Automatic Data Processing Inc.
The CED report is already circulating in Congress and the transition team. Clinton advisers may have mixed feelings about its specific recommendations. For one thing, it disapproves of a cut in personal income taxes for the middle class - part of President-elect Clinton's campaign promises.
"The stimulus program should emphasize private and public investments rather than consumption," the report says. A cut in personal taxes would primarily stimulate consumption. However, reports from Washington hint that Clinton may decide to drop the income tax cut idea in favor of deficit reduction.
A genuine recovery, says Ooms, would give Clinton more room to shrink a stimulus package and favor long-term measures.
The CED report does not take a position on Clinton's plan to boost taxes on the rich. Its mostly high-income authors see that as inevitable and "more political than economic," says Ooms.
But the report does approve an investment tax credit for business as "a long-term measure to raise productivity [that] could be structured to provide short-term stimulus as well."
It is in this area of long-term measures that the CED authors get tough. They figured, says Ooms, that Clinton will "almost certainly" have to raise revenues to cut the deficit and therefore decided not to be coy about tax hikes.
A growth strategy, the CED says, must involve an increase in national savings. The combination of savings by individuals, corporations, and state and local governments, minus the federal deficit, ran around 8 to 9 percent of national income between 1950 and 1980. During the 1980s, it fell to about 3 percent, and then dropped closer to 2 percent in the period from the end of the decade through 1991. That savings-rate decline currently costs the nation over $300 billion per year in lost output, or about $1 ,200 per person, the CED estimates.
"The main instrument for increasing saving must be deficit reduction," states the report. "As an interim target, deficits should be reduced by an average increment of $50 billion each for five years. The ultimate goal should be a small surplus of about 1 percent of national output, including Social Security surpluses, within a decade.
How to get there? Tax Social Security benefits like private pensions, urges the CED. Control Medicare costs. Do not liberalize Medicaid payments for the poor. "The `deficit problem' is rapidly becoming a `health care problem.' "
Many pundits agree on these measures, but will the politicians dare to carry them out?