Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: SUNDAY, August 1, 1993                   TAG: 9308010062
SECTION: NATL/INTL                    PAGE: B7   EDITION: METRO 
SOURCE: LOUIS UCHITELLE THE NEW YORK TIMES
DATELINE:                                 LENGTH: Medium

CLINTON PLAN NO QUICK FIX FOR ECONOMY

Instead, Clinton is proclaiming the same hard-nosed economic propositions that former Presidents George Bush and Ronald Reagan proclaimed as their guiding principle.

The irony is that Clinton, like his Republican predecessors, has locked himself into an economic theory that works in the imagination but perhaps not in practice.

The theory, in its baldest terms, is this: A shrinking budget deficit means the government needs to borrow less. Less government borrowing makes more money available for the public to borrow from the limited lendable funds. To lure the borrowers, lenders lower interest rates. And as the newly lent money is spent, the economy booms.

That sequence of events has never actually happened in America. Reagan and Bush preached a smaller deficit and then added to it. When the deficit did fall in the late 1980s, interest rates remained high. But in a nation obsessed with shrinking the deficit, lowering interest rates through deficit reduction has become the only acceptable economic policy. And Clinton has become an adherent.

"It is surprising to see, when you step back, how broad the consensus is on this key logic of economic policy," said John Lipsky, chief economist at Salomon Brothers.

A competing thesis briefly challenged this prevailing logic. During the election campaign, Clinton argued that the way to faster growth would be a shot of government spending on public works, among other things. The new spending would raise the deficit, but once the economy was back on track, deficit cutting would kick in.

Many prominent economists, among them several Nobel laureates, endorsed this view. But they fell into silence in February, when Congress - particularly congressional Republicans - said no to the president's spending proposals.

Nowhere has deficit reduction been embraced more militantly than in the budget debate. Virtually no one in either party any longer challenges the proposition that deficit reduction will eventually be good for the economy, and now Congress appears to be producing a bill that would make a substantial dent in the deficit.

In the short run, however, the economy has been despairingly weak, expanding in the second quarter at an annual rate of only 1.6 percent, the Commerce Department reported last week.

During the Bush administration, such reports drew scorn from Democrats. Now Laura D'Andrea Tyson, chairman of Clinton's Council of Economic Advisers, says: "It takes time for the American economy to react to lower rates."

And Labor Secretary Robert B. Reich adds: "I would be surprised if 1994 brought a buoyant recovery; the payoff will come after next year."

The current Clinton remedy is a set of tax increases and spending cuts that would make the deficit progressively smaller than it otherwise would have been. By 1998 the deficit would be $200 billion rather than the $360 billion currently projected by the Congressional Budget Office.

The president's conflict with Congress is not over this goal, only over how to reach it, with the president putting the emphasis on more taxes and the Republicans preferring more spending cuts.

Whatever the outcome, lower interest rates from deficit reduction - even if that formula works - guarantee that the economy will regain its vigor only very gradually. That raises the possibility that slow economic growth and high unemployment are what many Americans might really prefer, without quite admitting it, even to themselves.

The Federal Reserve says that rapid economic growth puts too much money in people's pockets. They go on buying sprees, shortages develop and prices rise.

"The ideal economic policy results in only moderate economic growth," said Henry Kaufman, a Wall Street economist.