Clinton's Lucky Numbers

By GEORGE J. CHURCH

He's going to do something. He really is. And it's going to work.

From Wall Street to Main Street, that seems to be the prevalent opinion of Bill Clinton's yet-to-be-unveiled tax-and-spending policy. Such faith might seem a gossamer launching pad for a blast-off by the $6 trillion U.S. economy. And the President is clearly arousing hopes that he could have severe trouble fulfilling. But as the drum roll for Clinton's State of the Union speech next Wednesday gets louder, what was a limping recovery from the 1990-91 recession is quickening into something more like a sprint.

Some stock traders might even be tempted to use the still taboo word boom. The Dow Jones industrial average last week shot up 4%, to a record Friday close of 3442. The 132-point rise in this blue-chip stock index for last week alone equaled its increase for all of 1992. Even more striking, bond prices rose enough to send the interest rate on long-term Treasury bonds down to 7.17%, the lowest since 1986 (the higher a bond's price, the lower its interest yield). Apparently bond traders, who usually do not trust Democrats, think that Clinton really will whack down the federal deficit while stimulating the economy. If they expected the deficit to rise, they would bid up interest rates, crippling the ability of consumers and businessmen to borrow.

The financial markets are sometimes a fun-house mirror of the economy, but now they seem to be reflecting the real world without too much distortion. To cite only some figures released last week: new orders to factories rose 5.3% in December; sales of new houses gained 6.3%; worker productivity, or output per man-hour, leaped 2.7% in 1992 for the biggest gain in 20 years. In spite of continuing layoffs at some of the country's largest employers, even the job market looks suddenly brighter. The months of what has ironically been termed "jobless prosperity" may be ending: unemployment in January fell to 7.1% of the civilian labor force, down from 7.3% the month before and the lowest figure in exactly a year.

"Clinton may well be the luckiest President in the history of the country," says Don McWhorter, president of Banc One in Columbus, Ohio. The Arkansan took office when cyclical trends were about to cause a long-overdue quickening of the recovery (which, in fact, began in the closing months of the Bush Administration). For example, despite the well-publicized losses at GM, IBM and Sears, corporate profits in general are soaring. Low interest rates have reduced the cost of paying off debt, and downsizing programs have made many companies more competitive. Says Hugh Johnson, financial strategist for the New York investment firm First Albany: "The stock market is telling you that with or without Clinton, the 1993 economy is going to be stronger than anyone thought."

But the speedup appears to be psychological too. Retail sales rose 1.2% in December, largely because shoppers who had long been too wary to buy more than they could pay for in cash became willing to go into debt again. Consumer credit rose at a 4.1% annual rate in December to $725.9 billion, the fastest rate in nearly two years. It seems no coincidence that surveys showed consumer confidence rising sharply right after Clinton's victory.

"There is a euphoria around about having a new President," says Henry Kaufman, a Wall Street economist never noted for rosy ebullience. Stephen Roach, senior economist with the investment branch of banking firm Morgan Stanley, concurs: "Investors see the nation has a new President with a new vision, and all this offers a new chance for the economy." Shoppers see it too, in the opinion of Ronald Gidwitz, chief executive of the cosmetics firm Helene Curtis. Says he: "Just believing this Administration is going to do some good can cause good things to happen."

One place where there is no euphoria, though, is the White House. Clinton pronounced January's lower unemployment as "better, but still too high," and lieutenants have dwelled on the short- and long-run problems of the economy. That is both commendable prudence and shrewd strategy. The Administration will need an atmosphere of concern to sell a program that will contain some highly unpopular measures.

Clinton and his aides have gone far toward mapping a strategy for selling ^ the program. In a week when a bewildering number of trial balloons floated around Washington, the President launched one of the highest flyers. He let it be known that he has about decided on a first-year injection of $31 billion into the economy. Half of it would be higher spending, half tax cuts for business investment. Given the quickening upturn, why is that much stimulus needed? Largely for political reasons, it seems: the money is a spoonful of sugar that is supposed to make some later medicine go down.

The medicine nonetheless will be bitter; if Clinton really wants to make a big dent in the deficit, he will have to propose tax boosts and spending cuts that will hit the middle class. "There are two arguments you can make," says a White House official. "One is: This is the only way out; it's best for the country and your children. The second argument is: You're not alone."

This week, TIME learned, Clinton will make a start by announcing that he will cut the White House staff 25%, lopping off 500 jobs out of roughly 2,000. That was one of many campaign pledges he had been backing away from. Advisers are convinced, though, that it is of great symbolic importance in showing that, as one puts it, "we're going to cut government -- gonna cut the hell out of it." Clinton has also repeated that he will propose much bigger tax increases on the rich than on the middle class. Leading candidates are a 38% top rate on incomes of $200,000 or more, vs. 31% now, and a 10% surcharge on million-dollar incomes. "We have to ask everyone to contribute something to get the job done," Clinton said in a Saturday radio address. "But we're going to ask the most from those who got the most and gave the least during the past dozen years -- those at the top."

Some of the biggest and most basic decisions -- how much to cut spending and where, whether to impose an energy tax and if so what kind, how and how much to try limiting Social Security -- remain unsettled. Even the size of the deficit cut to be sought is still under debate. Clinton's advisers are split between some deficit hawks -- Secretary of the Treasury Lloyd Bentsen, Budget Director Leon Panetta -- who urge a deep slash, and other officials -- Secretary of Labor Robert Reich, Secretary of Health and Human Services Donna Shalala -- who think it more important to deliver the economic growth that Clinton stressed in the campaign and not hit the middle class too severely. The President has talked of reducing the red ink $145 billion by fiscal 1997, which would be 38% below the latest forecast. But spokesman George Stephanopoulos now implies that the amount is less important than the direction. Said he last week: "For the past dozen years, we've seen the deficit go up every year. It would be a significant achievement if you got it going in the other direction." That, however, is the kind of talk that convinced most people, wrongly, that Clinton would back out of his pledge to cut the White House staff 25%.

The trick will be to produce a program that is both drastic enough to do the job and balanced enough to persuade most of the public that it is fair. Special interests are mobilizing to fight parts of the plan even before it is certain what they will be fighting. One group calling itself the United Seniors Association is putting out a mailing to a million elderly Americans urging them to oppose any curbs on Social Security benefits, and some 40 companies, including utilities and coal producers, have formed an Alliance Against the Carbon Tax to battle an energy tax. To prevent his program from being broken into pieces that such opponents can block one by one, Clinton will have to form a broad coalition, including people who will themselves feel some pain from the program. "This is a defining moment of his presidency," says Stanley Greenberg, Clinton's campaign pollster. It is also a defining moment for the future jobs and incomes of many millions of citizens.

CHART: NOT AVAILABLE

CREDIT: TIME Charts

CAPTION: NO CAPTION

STOCKS ARE THROUGH THE ROOF

CHART: NOT AVAILABLE

CREDIT: TIME Charts

[TMFONT 1 d #666666 d {Source: The Conference Board}]CAPTION: OPTIMISM IS BACK

CHART: NOT AVAILABLE

CREDIT: TIME Charts

CAPTION: INTEREST RATES ARE LOWER

With reporting by Bernard Baumohl/New York, Michael Duffy/Washington and William McWhirter/Detroit