Clinton Faces Juggling Act: Stimulating the Economy While Reducing the Deficit

IN the wake of the flood of policy papers and advice solicited from hundreds of participants at his economic conference here this week, Presi- dent-elect Clinton is now left to reflect on a fundamental question:

Is economic growth necessary to drive down the nation's nagging budget deficit or is deficit reduction needed first to ensure growth and a sustained recovery?

"This is a very tough call and the major economic-policy decision we're going to have to make," Mr. Clinton said. "We're going to have to decide what to do, how much, and when."

The president-elect said he will wait "as late as I can" to make that decision.

Clinton's campaign was full of pledges to boost the economy and put people back to work in the short term by increasing government "investments" in the nation's crumbling infrastructure and in job-training programs. In the days leading up to the election, the Democratic candidate spoke of a fiscal-stimulus package of up to $30 billion a year. At the same time, he stressed the need to curb the government's debt and hastened to add that he would avoid driving up the deficit with additional federal spending .

Felix Rohatyn, a Clinton adviser and New York investment banker, sees no choice between government spending and deficit reduction. He claims there is "no practical alternative" to doing both at the same time.

"We are $2 trillion underinvested in the public sector," Mr. Rohatyn said, and there is no prospect of many jobs being created in the future because of a trend in which "businesses and state and local governments are cutting back" on spending. Public investment that creates jobs and repairs the country's decaying roads, bridges, tunnels, buildings, and technology is "an absolute necessity," he said. He said Clinton's proposed $80 billion program over four years could be financed by a separate budget fun ded by bonds and a gas tax.

Accompanying this fiscal stimulus, he says, should be "a credible deficit-reduction plan" that includes an "investment tax credit as one of its components offset by other [spending] cuts."

Henry Aaron, director of economic studies at the Brookings Institution, is wary of quick-stimulus proposals. If the economy continues to show signs of improvement, he said, plans for a fiscal stimulus package "should be extremely small or possibly shelved." And any new government spending should be covered by federal budget cuts and/or an increase in tax revenues, he said.

Clinton said that, "with the present tax system," he does not favor higher taxes on gasoline or consumption "because it's unfair to the middle class." While avoiding specifics, he did say, "There will plainly be some entitlement reforms."

A recurring theme of this week's conference was the need to control health-care costs - the biggest contributor to the growth in government debt. Clinton clearly stated that health-care reform is essential to cutting entitlement spending. But Mr. Aaron cautioned the president-elect not to count on the likely "meager savings in your first term" to shave the deficit or finance new programs. (However, Aaron estimated, "large savings are possible by the year 2000.")

Adding to Clinton's problems is the fact that spending on programs such as Medicare and Medicaid, welfare, food stamps, law enforcement, and public housing pose as big a drag on efforts to reduce the deficit as spiraling health-care costs. In the cities alone, these programs cost $200 billion a year, said Bruce Ratner of the Brooklyn (N.Y.)-based Forest City Ratner Companies.

Clinton asked his guests this week to propose ways of continuing the dialogue begun at the Little Rock conference. He seemed to revel in the give-and-take with the participants, as well as with callers from across the country. "This will continue throughout my administration," he told reporters. It's the "kind of effort we have to make to reconnect Americans to their government."

But some of the participants, though impressed by Clinton's absorption in national economic problems, grew impatient with his approach. Carol Bartz, who runs Autodisk, a California software company, implored Clinton to stop surveying industrialists and economists and assume an leadership role.

"As a medium-sized-business leader, I applaud the fact-finding you're doing," she told the president-elect in a no-nonsense tone. "I do that in my own business. But then I get on with it. If I don't, I'll go out of business. So much for consensus; get on with making decisions as fast as you can."