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Text File | 1992-10-19 | 11.2 KB | 230 lines

                                                                                NATION, Page 24

COVER STORIES

May the Best Plan Win


Tsongas and Clinton agree that the U.S. must adopt a long-term
plan to boost investment and create jobs. The biggest difference
between them is over whether the middle class ought to get a
tax break.

By JOHN GREENWALD -- Reported by Laurence I. Barrett/Chicago and
Tom Curry/New York


    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.