Captain Clinton at the tiller - failure of Bill Clinton's economic polices to reduce entitlement programs - Editorial

National Review, April 26, 1993

|I Looooove the stock market falling. In the 1980s the stock market rose 300 per cent and real income fell. Maybe now the stock market will fall and real income will rise." James Carville must be positively ecstatic now that the bond market, which was still strong when he said these words, has started to falter too. On April 2 interest rates on thirty-year Treasury bonds rose above 7 per cent, wiping out the bond-market rally that followed President Clinton's State of the Union address.

After the praise for Mr. Clinton's skill in getting his "deficit reduction package" passed as written, this upset must have astonished official Washington as well as unofficial Mr. Carville. But a certain insight is essential to understanding economic debate, particularly when conducted by politicians: The U.S. economy is like a ship in the sea. It is subject to contradictory forces, moves in unexpected ways, and above all else takes time to turn around. But it also has a systematic rhythm which can be understood and even anticipated.

For some months, the economy's bows have been rising up out of the trough into which the ship plunged after the Bush tax-and-regulate betrayal. There is considerable momentum behind this movement. Since November personal income has been rising at an annualized rate of 7 per cent and industrial production at an annualized rate of some 5 per cent. Since capacity utilization is still fairly low - about 80 per cent - the trend will probably continue, perhaps for as much as two years.

The Clinton Administration will certainly claim credit. Indeed, the New York Times on the Administration's behalf attempted to do so even before Inauguration Day, arguing that the recovery was due to a revival of confidence caused by Mr. Clinton's election. Although this is irritating, every expansion involves misallocation that must eventually be corrected, and the likelihood is that the economy's momentum will be downward by Election Day 1996.

But the Administration is also shifting the cargo and jiggling the tiller in a manner that will cause the economy to lose way more quickly. The absence of any controls on Social Security, Medicare, or Medicaid - entitlements that account for more than half of federal outlays - means that every $1.00 of additional tax revenues will spawn $1.60 in higher spending, as it has for the past thirty years. Even the much-vaunted investment-tax-credit proposals, as Steven Entin pointed out in a recent newsletter of the Institute for Research on the Economics of Taxation, are too minor and restricted to offset the increase in the cost of capital caused by Mr. Clinton's proposed energy- and income-tax increases. All of these factors threaten to capsize the Administration's deficit projections. And after Mr. Clinton gets his $250-billion tax hike, the only politically viable tax left will be the one that doesn't require congressional approval: inflation.

The faintest whiff of inflation is always poison for bond prices. But thirty-year rates don't turn on short-term prospects. Wall Street sees the Clinton plan as portending greater government intervention and slower economic growth. Indeed, the gold market has suddenly started its most vigorous twitching in several years, breaking out of its recent remarkably narrow $320-$333 trading range. There has been a protracted dispute among monetary economists as to whether the Federal Reserve has been too loose or too tight. But any gold rally will certainly look like confirmation that Clintonomics, like Carternomics, will end in stagflationary crisis.

Indeed, as we go to press, there is a flurry of concern on Wall Street that several just-released and unexpectedly weak statistics - new housing starts, employment, car sales - mean that this loss of way is already occurring. Most ominously, consumer confidence surveys are down suddenly and sharply. This is exactly what happened after the 1990 budget "compromise." The Bushies tried to blame the Gulf War, but in fact the deterioration had set in earlier. And it meant recession.

We tend to think that some of this is just spray and spume, and that the economy's bows will continue to rise - for a year or two. But the real issue is where the ship is being steered. And that is going to become unpleasantly clear much sooner.