May The Best Plan Win

By John Greenwald

Bill Clinton and Paul Tsongas are a far cry from traditional Democratic presidential candidates who stressed spending and aid for the poor. Instead, both have set their sights on long-term economic growth and the restive middle class. Apart from a sharp disagreement over the value of a tax cut for the middle class that Clinton supports and Tsongas opposes, the difference between them lies mainly in the contrast between Tsongas' tough prescriptions and pro- business leanings and Clinton's emphasis on training and education and seemingly greater willingness to tailor his message to the prevailing political mood. The strengths and weaknesses of their major economic proposals:

INCOME TAXES. Clinton has grabbed center stage with his tax-cut plans. But while shifting burdens from the middle class to the rich might make the tax system fairer, it would do little to stimulate the economy. Clinton would reduce the 15% and 28% rates to 13.5% and 26.5% and pay for the cuts by raising the top bracket from 31% to 38.5%. So the extra $350 a year -- or 97 cents a day -- that the plan gave the average family would simply come from the rich without creating new spending power. "This will not do anything in the long term to increase people's standard of living," says Nariman Behravesh, president of the Pennsylvania forecasting firm Oxford Economics. "It deals more with politics than with economics."

But the 10% tax cut is not the only arrow in Clinton's quiver. When combined with the child credit, he says, his program would save the average family with two children as much as $1,300. However, Clinton's promise to finance the credits partly through cuts in federal administrative costs sounds suspiciously insubstantial.

Tsongas, who would increase the tax rate on incomes of $200,000 or more, charges that if Clinton's boons for the middle class worked at all, they would merely stoke consumption rather than encourage savings and investment. Concurs Jeff Faux, president of the Economic Policy Institute, a liberal Washington think tank: "The No. 1 priority should be investment in resources that help the country produce efficiently." In rejecting Clinton's politically flashy but economically pallid proposals, Tsongas has a strong case and gets the better of the argument.

CAPITAL GAINS. Both candidates have ventured into traditional Republican waters just by offering capital-gains cuts, but Tsongas has taken a far deeper plunge. His plan, which calls for rates to decline the longer a stock is held, would cost about $5 billion a year, vs. $200 million for Clinton's proposal. For the money, Tsongas wants to encourage long-term investment in U.S. manufacturing while Clinton would funnel funds to start-up companies that could become hotbeds of jobs and new technologies.

Each candidate's plan has serious drawbacks. For example, investors could buy stock in firms like fast-food franchisers under the Tsongas proposal, leaving struggling manufacturers still starved for funds. And the big winners under Clinton's plan would probably be the armies of lawyers and accountants who would work overtime to get tax breaks for their clients. "Lawyers will tell you that any tax planner can make something look like a start-up," says Princeton University economist Harvey Rosen. At the same time, some studies show that cuts in capital-gains rates have done little to spur investment over the past 20 years. "It is not a major factor in terms of capital formation," notes Susan Wachter, professor of finance at the University of Pennsylvania's Wharton School. So for all their sound and fury, neither the Clinton nor the Tsongas plan would be likely to have much impact on economic growth.

COMPETITIVENESS. The harsh truth underlying U.S. economic woes is that America has lost its competitive edge to such hard-charging rivals as Germany and Japan. Regaining that edge will take everything from beefed-up support for research and development to training workers who can compete effectively in the 21st century. While Clinton and Tsongas are in striking agreement on some major prescriptions, they disagree just as strongly on which aspects to stress.

Clinton has made himself the training and education candidate. He would create a national apprenticeship program for high school students who are not college-bound and would require companies to invest the equivalent of 1.5% of their payroll to train all workers. He also wants preschool for every needy child, national examinations for elementary and secondary students, and guaranteed tuition for college students, who would repay it in cash or with national service. To help finance all this, Clinton would pare $100 billion from the defense budget over the next five years -- twice what the Bush Administration proposes to cut.

Tsongas' education and training program looks pale by comparison. Calling public schools "the meetinghouses of our society," he advocates measures like merit pay for teachers, and would require high school students to pass a national test before graduation. On the subject of job training, he has little to say.

Clinton's training and education prescriptions clearly have the edge. To make his ambitious programs work, however, he would have to avoid pitfalls that have haunted the Federal Government's job-training efforts since Lyndon Johnson's Great Society. Such problems range from runaway costs to the difficulty of predicting what skills will be in demand five years in advance.

The real thrust of Tsongas' program lies in his efforts to shore up America's declining manufacturing base. He calls far more strongly than Clinton for an industrial policy that would pick winners among emerging new industries. To do that, Tsongas would create a federal office somewhat akin to Japan's famed Ministry of International Trade and Industry that would finance and develop new technologies. But the problem, as critics of industrial policy never tire of pointing out, is that no one really knows which promising discoveries today will blossom into thriving industries tomorrow.

To help bridge that gap, Tsongas would use government funds to assist companies in turning their ideas into lucrative products. That could halt an embarrassing trend in which Japanese firms have frequently adopted U.S. know- how, such as microchip technology, and then used it to clobber American companies.

Tsongas' emphasis on manufacturing colors his tax-break ideas for business. To encourage companies to make immediate investments in new plant and equipment, he advocates a one-year tax credit that would cost $5 billion. Clinton calls instead for a permanent investment credit for small and medium- size companies that would cost $2 billion a year. Both candidates would make permanent an existing 20% tax credit for research and development that expires Aug. 1.

Many economists see little to choose from between the Tsongas and Clinton business-tax proposals. On one hand, they argue, Tsongas' broad investment credit could be frittered away on real estate or other nonmanufacturing industries. And the one-year tax break would scarcely stimulate long-range growth. "In terms of a long-term agenda," says Princeton's Rosen, "a temporary tax credit is totally bizarre." On the other hand, Clinton's targeted credit could funnel funds to firms that don't need them and miss companies that do. "We don't really know which industries would be helped or hurt by this credit," says Wharton finance professor Wachter.

When it comes to commerce with other countries, both candidates support a free-trade policy but would impose sanctions on nations that discriminate against American products. Tsongas wants consumers to practice "economic loyalty" by purchasing domestic goods when they differ little from imports in price and quality -- a curious mixture of consumerism and Buy America policies.

Ideally, of course, a program to recapture America's competitive might would combine Clinton's emphasis on training and education with Tsongas' determination to buttress manufacturing. But in the absence of any such hybrid strategy, Clinton's focus on people seems more humanly and economically appealing. It is people, after all, who are the ultimate competitors.

SOCIAL SPENDING. While Clinton's low-key welfare plan has drawn little attention, Tsongas' suggestion for capping the growth of Social Security and other entitlement benefits has become a hot campaign issue. Clinton's denunciation of the idea in Florida attack ads last week helped cost Tsongas that state. Yet experts say the politically unpopular notion makes sound economic sense. "You have got to limit entitlements if you ever want to get the deficit under control," notes economist Cynthia Latta of the consulting firm DRI/McGraw-Hill. Wharton School finance professor Jeremy Siegel faults Tsongas for not going further. "It's a little Band-Aid," Siegel says of the plan. "We have to reform Social Security radically."

On the related issue of health insurance, Tsongas' plan to hold down Medicare and Medicaid expenses by having health-care providers submit competitive bids also looks sensible. Clinton, by contrast, has put forth few credible cost-control ideas other than to say he would establish a government board to regulate medical prices.

ENERGY. Tsongas has taken heat from Clinton's ads for proposing a gasoline-tax increase -- even though Clinton himself supported a 5 cents-per-gal. hike in the Arkansas gas tax last year. Despite his opponent's attacks, Tsongas' higher gasoline tax would help curb America's energy use and would provide funds for mass transit and rebuilding roads and bridges and would reduce the budget deficit. Siegel calls the proposal "a very brave position."

Tsongas' endorsement of nuclear power looks just as unpopular, particularly among environmentalists who might otherwise be his strong supporters. But a new generation of smaller and safer nuclear plants could help meet U.S. needs for electricity from sources that are free of the so-called greenhouse gases that appear to cause global warming.

How would all these well-laid plans fare in a Clinton or a Tsongas Administration? Given Clinton's natural something-for-everyone style, he might be tempted to compromise away much of the substance of his programs in negotiations with Congress. Tsongas, by contrast, might sternly stand fast until he either got what he wanted or forced a split between his Administration and the congressional wing of his party. But if they could strike the right balance between principle and compromise, both Clinton and Tsongas would have the makings of policies that could begin to revitalize the economy.

With reporting by Laurence I. Barrett/Chicago and Tom Curry/New York