How Much Can He Do?

By JOHN GREENWALD Reported Tom Curry/New York, S.C. Gwynne/Washington, and William McWhirter/Chicago

BILL CLINTON HAD NO SHORTage of advice last week about how to fix the U.S. economy. Innumerable pundits, still wheezing after the long campaign, devoted themselves to speculating and kibbitzing about his every option. Should he immediately attack the deficit Dracula that is sucking the life out of the economy? Or should he first focus on putting people back to work with a short- term stimulus package, and thereby risk worsening the deficit? Clinton had remained coy since election night, maintaining a low profile in Little Rock, Arkansas, and emerging mostly for photo opportunities.

The silence ended with a bang last Thursday, when Clinton declared that he intends to move quickly to create jobs and stimulate the economy at the expense of a modest short-term increase in the deficit. At his first news conference since the election, Clinton vowed to stick to an economic program that includes tax hikes for the rich, tax cuts for the middle class and an investment tax credit to help business. He also left little doubt that he intends to ask Congress for some $20 billion next year to rebuild America's roads, bridges and highways. Denying postelection reports that he wanted to lower expectations and slow the pace of his promised reforms, Clinton insisted, "I expect to keep the focus on these economic issues, and I'm not trying to scale back or scale down or anything else."

Even as he declared his support for new spending, Clinton reaffirmed plans to cut the budget deficit in half by 1996. "What we have to do is have a disciplined reduction in the debt so we can send a clear signal to the markets at home and abroad that we're going to bring this deficit down," the President-elect said. Yet critics point out that the numbers have never added up in Clinton's program. For example, Clinton's own advisers privately concede that a plan to raise $45 billion by closing tax loopholes on foreign corporations would probably net closer to $5 billion.

To help prepare for his first 100 days in office, Clinton plans to invite economists, executives and labor leaders to a Little Rock summit next month to diagnose the economy's ills and prescribe remedies for them. "If we're lowering expectations, summit was a bad choice of words," says a rueful adviser. Though the forum is shaping up as a centerpiece of Clinton's transition, the record of such talkfests has often been meager. Gerald Ford's 1974 meeting of the minds produced mainly red-and-white WIN (Whip Inflation Now) buttons that proved to be little more than good grist for Johnny Carson monologues. "If it's just blah-blah-blah, it's a total waste of time," says Hewlett-Packard chairman John Young, a Clinton supporter. "But if it's eight or 10 people fine-tuning, framing and giving direction to a policy, that's another thing altogether."

One of Clinton's biggest concerns will be the global nature of the economic slump he must confront. With unemployment stuck above 7%, the U.S. desperately needs vigorous exports to put people back to work. But Europe too is mired in a downturn, and the collapse of Japan's financial and real estate markets has left that economic superpower reeling. "There's no way the economies of Europe and Japan can provide an engine of economic growth for the U.S.," says Barry Bosworth, an economist at the Brookings Institution. "Clinton will not be bailed out by a strong expansion overseas."

Leaders around the world -- who know that it will take a strong U.S. recovery to help right their own foundering economies -- anxiously watched the Clinton transition last week for clues to the new President's trade and economic policies. "We cannot hope for a healthy Japanese economy while the American one is sick," says an official of Japan's Ministry of International Trade and Industry. Says Gunther Albrecht, chief economist for the German Chambers of Commerce and Industry: "The talk is of putting a higher priority on U.S. domestic matters, and that could mean a harder line on some issues, and protectionism is one of them. That would be bad for the world economy."

What Clinton actually does after his Jan. 20 Inauguration will depend on what he makes of the tentative signs that the U.S. economy might be starting to recover. Most experts are skeptical. Despite gradually falling unemployment and a surprising 2.7% surge in the third-quarter gross domestic product, business and consumer spending is expected to continue to languish next year unless Clinton acts to stimulate growth through public works spending or other programs. "We're just not going to see a very vigorous economy," says Donald Ratajczak, director of economic forecasting at Georgia State University. "After the first quarter next year, if the world is still in recession, we're going to go back to very sluggish growth."

Most economists agree that the U.S. recovery is far weaker than the recent 2.7% GDP growth spurt indicates. "That was a nice number, but not sustainable," says Lea Tyler, manager of U.S. economic forecasting for Oxford Economics in Pennsylvania. The results included a temporary bulge in defense orders and a consumer shopping spree that blossomed in July but quickly faded in August. Moreover, Tyler said, the mild drop in unemployment from 7.5% in September to 7.4% reflected a shrinking labor force as students returned to the classroom and discouraged workers stopped looking for jobs.

"My gut reading says the economy is not picking up to anything like a normal recovery," says a Clinton economic adviser. At the same time, he adds, "the likelihood of a sharp downturn or a sharp upturn is small. We're not suddenly going to grow at 6% or shrink by 2%. I see absolutely no evidence for a return to a technical recession."

To snap the economy out of its doldrums, 100 leading economists called in March for a $50 billion-a-year federal spending program -- 2 1/2 times the size of Clinton's campaign plan to rebuild the infrastructure. "The economic arguments still apply today," says James Tobin, a Yale Nobel laureate and a prominent member of the group. "Fifty billion dollars is 1% of gross domestic product," Tobin adds, noting that it would not be an excessive stimulus. "One could argue that $50 billion is not enough." But Robert Solow, an M.I.T. Nobel laureate who also backed the plan, provides a note of caution. Says he: "The stimulus idea still applies now, but who can tell what conditions are going to be like at the end of January?"

The stakes are high in this forecasting game since any misreading could cause the new Administration to stumble. Although Clinton won the White House largely by bashing Bush's feeble economic policies, some experts warn against trying to jump-start growth next year if business really is improving. "The worst thing they could do would be to stimulate the economy just as it seems to be growing all by itself," says Edward Yardeni, chief economist for the Wall Street firm C.J. Lawrence. "That would create concerns about overheating the economy" and could reignite an inflation rate that is now in the low 3% range. Last week the Commerce Department provided evidence that the recovery may be gaining momentum: its report said retail sales climbed 0.9% in October, the biggest gain in three months.

Aware of the dilemma, Clinton has been trying to dampen expectations about what he can achieve in his first 100 days -- or even his first 1,000 days -- in the Oval Office. Clinton declared last week that "the American people understand that these problems are of long duration and there won't be any overnight miracles. But I think they expect aggressive and prompt action," he added, "and I'm going to give it to them."

Clinton's warning against miracles seemed intended to serve a double purpose. On the one hand, he wants to discourage people's hopes for immediate delivery of all the goodies, ranging from jobs to health-care reform, that candidate Clinton promised. On the other hand, he needs to reassure nervous investors that he will not worsen the deficit or overheat the economy. Such moves could cause bond buyers to drive U.S. interest rates higher and torpedo the recovery.

To keep the deficit from growing larger, Clinton will have to ask the public to make sacrifices to pay for his programs. But he remains reluctant to bite that bullet. For example, Clinton has never said where he expects to find the billions that it would take to provide government medical insurance for everyone not covered by company programs. Slapping a large payroll tax on employers would hurt small businesses and drive up unemployment. And a general tax increase would violate Clinton's pledge not to squeeze the middle class to finance his programs.

Unlike Ross Perot, Clinton has studiously avoided talk of tax hikes or spending cuts that could spread pain across the populace. Nor has his economic program discussed possible reductions in Medicare and Social Security programs. During the campaign, moreover, he flatly rejected the idea of higher gasoline taxes, calling them "backbreaking." But now is precisely the time to talk of sacrifice. "He's got a honeymoon," says economist Ratajczak. "So he has to decide what nastiness he's going to serve up that the honeymoon will sugarcoat. And he has to serve up that nastiness early on."

One strategy that some of his advisers are pushing: tie the short-term stimulus plan securely to a package that also contains medium-term deficit- reduction measures. A pork-happy Congress will readily pass the former, so it must be made to swallow the latter at the same time. That would have the added advantage of reassuring credit markets, justifiably jittery about the prospects of an even higher deficit, and thus prevent long-term interest rates from spurting even higher.

Fortunately for Clinton, he will take office with high hopes from voters and far more business backing than perhaps any other Democrat since Franklin Roosevelt entered the White House in 1933. "You just can't get the country moving again without the help and support of the business community," says Young of Hewlett-Packard.

At least part of that support reflects disenchantment with the disarray and inertia that marked Bush's economic management. "A lot of Republicans felt that any number of things weren't being addressed by the Bush Administration and that we were drifting toward a depression," says Dwayne Andreas, chairman of agribusiness giant Archer Daniels Midland and a longtime G.O.P. stalwart. "People will be very patient with Clinton if he appears to be heading in the right direction," Andreas adds, "because it will take a lot of time to get the economy turned around and moving again."