President Battles `Elusive Payoff' For Fiscal Plan

POLITICAL pundits say President Clinton's success as chief executive hinges on whether he wins approval for his fiscal stimulus package. But to many observers, the true test is whether the promise of more jobs and selected tax benefits will boost the morale of consumers and businesses, whose spending and hiring is essential to economic growth.

While Mr. Clinton's election and his pledge to redress economic problems buoyed consumers' confidence, his State of the Union address last night will likely have a negative impact on their expectations, says Gail Fosler, chief economist of the New York-based Conference Board, whose monthly indexes of consumer confidence produce one of the nation's unofficial economic indicators.

Ms. Fosler compares Clinton's message to what Ronald Reagan vowed to Americans shortly after he was elected to office in 1980 by voters worried about their economic future. "Reagan promised immediate change, and immediate benefit," she says.

While Clinton campaigned on the same offering, "now we're getting all this talk about sacrifice - that things will have to get tougher in the short run to be better over the long term," Fosler says. But few Americans can relate to pledges of more federal spending on roads and tunnels or job-training plans, she says. And they are puzzled by more new taxes with an "elusive payoff".

Support for the package is waning. But defenders such as investment banker Felix Rohatyn stress its need. Mr. Rohatyn says it is essential because federal funding is the only ready capital available.

However, the stimulus package is too small to effect positive change, and could prove damaging, argues Ohio University Professor Richard Vedder, who co-authored "Out of Work: Unem- ployment and Government in 20th-Century America," released last week. "Even if you were a die-hard believer in public works projects, you'd be hard pressed to find one that is so small having a great impact," Mr. Vedder says.

The White House plan is to create 500,000 new jobs by the end of 1994, and have a multiplier effect on economic growth. But even if all these jobs are realized, according to many studies released this week, they would only shave one half of 1 percent off the current 7.1 percent unemployment rate. The most "optimistic scenario," Vedder says, is one in which the $16 billion job-related portion of the stimulus generates three times that in terms of consumer demand and business hiring. "That's still only an increase of $48 billion - eight- tenths of 1 percent of the nation's $6 trillion economy."

Vedder is also skeptical about the long-term impact of the stimulus. He points to state and local governments as "great laboratories" for examining the link between public spending and economic growth. In his survey of all 50 states from 1980 to 1990, he found "zero relationship between the increase in highway expenditures [a staple of public works projects] and the rate of economic growth in states."

ANY long-term gains from more federal spending, he says, will be "precisely offset by the negative impact of higher taxes" or government borrowing that adds more debt and pushes interest rates higher.

"The key to the job picture in America is a fundamental change in the business outlook," Fosler asserts. She says "marginal measures" such as the stimulus package could end up dampening business conditions - higher interest rates deflate business confidence.

Lessons businesses learned from the excesses of the 1980s and the recession have netted structural operational changes, including leaner inventories, smaller employment rolls, and the ability to produce more at lower cost. Strategists from dozens of blue-chip firms and small enterprise groups argue for permanent investment incentives, greater access to capital, and cheaper borrowing, not brief spurts in federal outlays.

Fosler says she believes business will be "extremely ambivalent" concerning Clinton's plan. Research and development tax credits, for example, "will only help offset their higher taxes under Clinton's plan." Small and mid-sized firms - the biggest job generators - are fighting a host of regulations that they say will not be offset by an R&D tax credit and other incentives.

US firms will only invest and create jobs "with reasonable certainty about the future," says William Brock, who served as labor secretary under Reagan and is a past US Trade Representative. Clinton's stimulus package, he says, will fail to add permanent jobs and marked economic growth and could cost the president needed credibility.

Instead, Mr. Brock urges, Clinton should push for international trade agreements to help reverse the industrialized world's downturn and create a climate in which open markets and a broader set of trade rules inspire business to expand.