Why grim Greenspan and not cheerful Bill? Because in the long run, the interest rates presided over by Greenspan will have a lot more to do with the direction of the economy than any of the flashier proposals enumerated in Clinton’s grandly titled “A Vision of Change for America,” the 145-page blueprint he and his troops have been promoting for the past two weeks.
Clinton’s plan is being sold as a way to stimulate the economy by creating faster growth and more high-tech, high-paying jobs through an activist government. Sounds good, but it’s mostly a sham. Consider:
Clinton is pushing for an immediate $30 billion injection of investment tax credits and government infrastructure investment that will accelerate the current expansion. But much of this new spending is for welfare and education, not investment. And in the fine print, the president’s own document admits that only $15 billion of his “stimulus”-an amount almost too small to notice-is expected to hit the economy in 1993. Last week the president agreed to postpone even this program for a few weeks. Goodbye, 1993 stimulus. And after 1993 comes serious deficit reduction. Tax increases and defense cuts will suck $473 billion in spending out of the economy over the next five years.
The president’s plan claims to stimulate private investment with a $10 billion-a-year tax credit and cuts for business, and a small business capital-gains tax cut. But Clinton’s many tax hikes on business are even bigger-$19 billion a year, with energy taxes upping the ante even more. Add in $32 billion a year in taxes on the wealthy, and Clinton’s tax program is a major drag on private investment, not a stimulant.
Even Clinton’s vaunted program of public investment is mostly rhetoric. Much of what he calls “investments” are for handouts like food stamps or for spending on health, training and education-worthy programs, perhaps, but investments in no known language except Clintonspeak.
So should Clinton be pilloried for playing a Reaganesque smoke-and-mirrors game? No-not yet, at least. The fact is that a big stimulus package would do more harm than good right now. It would just reignite inflation at a time when the markets finally believe that the old price-wage spiral is broken. A better idea is to slowly but certainly lower the deficit. That will reassure the bond markets that inflation is under control-freeing interest rates to continue their downward slide. In the end, lower interest rates will do much more to spur economic growth than any government-spending program.
The Clintonites know this, even if they don’t exactly advertise it. If it weren’t for the welcome that the bond markets are giving Clinton’s new austerity, most economists would forecast a recession. Hence Greenspan’s seat of honor next to Mrs. Clinton on Capitol Hill. He has assured Treasury Secretary Lloyd Bentsen that credible deficit reduction will mean lower long-term interest rates. Bentsen has accepted a Greenspan rule of thumb that each one tenth of a percentage point reduction in interest rates provides the equivalent of a $10 billion fiscal stimulus to the economy. Rates have fallen three quarters of a point since Clinton’s election-providing $75 billion in stimulus under Greenspan’s formula. This calculus hung over every budget decision President Clinton himself made-to the exasperation of the president’s political advisers, who naturally like to hand out government goodies. “I heard more about the bond market in the last two months than anything else,” says James Carville, Clinton’s political consultant. “Mr. Bond Market designed this budget almost as much as Mr. Clinton.”
The real test for the president will be to stick to his deficit-reduction plan. If he can restrain Congress from its usual profligacy over the next few years, he has a good shot at keeping down those all-important interest rates-not to mention getting himself reelected. Who knows? By Clinton’s 1997 State of the Union Message, maybe even Alan Greenspan will be smiling.
