The Clintonomics trap.

• Author: Alperovitz, Gar

President Clinton's economic program has been approved by Congress in its overarching dimensions, notwithstanding the Senate's defeat of his modest stimulus package. Suppose the larger program works and significantly reduces the deficit-what are the likely real-world outcomes?

Give or take a minor up-tick, the longer-term result will almost certainly be to reduce economic growth, cut job growth, and accelerate a longer historical trend toward profound economic stagnation and decay. Elements of this counter-intuitive result are no longer much in doubt. The main questions - big ones - involve how massive the effect will be.

The hope is that reducing the deficit will comfort the bond market, thereby reducing interest rates, and that this will, in turn, actually induce new investment to boost the economy. However, a number of specialists - but, as yet, few political observers - have begun to realize that the Clinton plan is radically anti-Keynesian Its design and current goal are to withdraw almost $400 billion in stimulus from the economy over the next four years. This fact has consequences.

It is a mistake to be misled by the modest economic upturn. As a number of bitter Republicans point out, the main course of the current mini-cycle was set during the last year of the Bush Presidency. Although Clinton's election probably helped spur some new confidence, the current "recovery" is extremely mild and unstable by historical standards, and is not likely to produce many new long-term jobs.

Historically, the rate of growth in the first year-and-a-half of a recovery has averaged 9.8 per cent, with unemployment falling by 1.8 per cent. This time, we're experiencing a slow-motion "recovery": In its first year-and-a-half, the economy grew at a rate of 2.9 per cent, while unemployment increased by 0.7 per cent. There has been a slight improvement in recent months, but a high proportion of the new "jobs" are part-time. A recent Blue Chip Economic Indicators survey projected 1993 growth of 3.1 per cent, yielding only a fractional fall in the average unemployment rate for the year as a whole.

The Clinton plan is especially problematic when we focus on the next four years. There is little doubt that it will reduce economic growth below what it would otherwise be, and that it will reduce job growth. Several recent forecasts have come to the same surprising conclusion. For instance, Allen Sinai, chief economist of the Boston Company, testified before Congress recently that Clinton's proposals would produce "a somewhat stronger economy in 1993, up by 0.2 percentage points, then weaker, with real GDP [gross domestic product] growth of approximately 0.4 percentage points a year from 1994 to 1997."

Lawrence Chimerine, senior economic counsel for DRI/McGraw-Hill, similarly testified that "the Administration program is likely to hold down economic growth during the next three to four years by between 0.2 per cent and 0.4 per cent per year, even after factoring in the impact of long-term interest rates. That would be true of any program that reduces the deficit. . . ." Another study by DRI/Mc-Graw-Hill predicts that the plan will create no new jobs this year and lead to a net loss of 250,000 jobs in 1994.

The main reason is obvious: The plan taxes more than it spends. It thus withdraws Government support and stimulus from the economy. That is its purpose.

I like many of the social, environmental, infrastructure, technological, and tax programs Clinton has proposed, but that is beside the point. Considered as a package (the way Clinton has asked us to consider it), the plan is fundamentally deflationary.

The budgetary concepts that undergird Clinton's economic strategy are, in fact, the same ones urged by the three Presidents whose policies paved the way for the Great Depression - Warren Harding, Calvin Coolidge, and Herbert Hoover. As late as 1933, Hoover held to the view that "it would steady the country greatly if there could be prompt assurance that . . . the budget will be unquestionably balanced."

Comparing Clinton's proposal with Ronald Reagan's policies is also instructive. Reagan was a radical military-Keynesian. He dramatically increased both Government...