Deficit dilemma underlies Clinton push for summit

WASHINGTON -- President-elect Bill Clinton's rush to pick his top economic team and hold his planned economic summit testifies to the urgency of the dilemma he faces on the federal budget deficit.

Having promised to halve the deficit in four years, he now faces the possibility of initially having to increase it to jump-start a still listless economy -- a prospect that has unsettled the country's financial markets. The economy is growing at less than half the normal rate for post-World War II recovery periods.


Mr. Clinton acknowledged yesterday that there were "a lot of very troubling signs in the economy." Although the unemployment rate has declined slightly, manufacturing unemployment has risen and production has declined, he said.

He stressed the importance of an economic summit, expected to be held before Christmas, as a way to "get as many good ideas as I can" to improve the economy.


There is widespread anticipation among business leaders and economists that the pace of growth foreseen in the Clinton economic blueprint will not materialize without further stimulation.

"The question is how much" stimulation, said David Wyss, an economist with DRI/McGraw Hill, Boston-based consultants. The group assumes that Mr. Clinton will have to increase the deficit by $25 billion to $30 billion in his first year to create around 500,000 jobs.

"I think that is livable, and I think that is probably discounted by the [financial] markets already. He would only want to maintain that for one fiscal year. The deficit would widen in fiscal '94 and then be squeezed back," suggested Mr. Wyss.

Other economists are less convinced Mr. Clinton will introduce a deficit-widening stimulus.

Diane Swonk, an economist at the First Chicago bank, said the structural problems of the economy -- including the surplus of real estate and the cutbacks by major corporations -- were too big to be overcome in the short term.

"With the reality of the structural problems that are still out there, it is going to be difficult for Clinton to do much in 1993 and 1994," said Ms. Swonk, adding: "What he will do is not much of anything."

Reports during the campaign of preparation of a stimulus package for immediate introduction after the January inauguration were quickly denied by Clinton advisers, but the financial markets remained spooked by the prospect of a Democratic victory and a wider deficit. In the past three weeks, long-term interest rates have increased by a half-percentage point, putting yet another dampener on spending and investment.

"The bond market has been doing horribly," said Maury N. Harris, chief economist with Paine Webber Inc. of New York. He said the markets were "afraid" of the impact of the next administration's policies on the deficit.


The markets are now anxiously awaiting the appointment of Mr. Clinton's top economic officers for clues to the next administration's economic approach. Selection of any perceived "big spenders" for positions of economic power could drive long-term interest rates up further.

"My bond market clients are already saying there is a potential for going up another 100 basis points [1 percentage point on long-term interest rates] with a deficit increase," said Stanley Collender, director of budget policy for Price Waterhouse.

"Clinton has a problem with the bond market, which says, 'Any deficit beyond that which we know, we don't like.' On the other hand, if he does nothing, he faces a disappointed electorate to which he promised" action, he said.

Vernon Jordan, chairman of Mr. Clinton's transition team, said over the weekend that he hoped the key economic appointments -- treasury secretary, budget director, chief economic adviser and chairman of the new Economic Security Council -- would be made by Thanksgiving.

Names frequently mentioned for the top jobs are Robert Rubin, co-chairman of Goldman Sachs & Co.; Roger Altman, chairman of the Blackstone Group; Texas Sen. Lloyd Bentsen, who chairs the Senate Finance Committee; Ira Magaziner of SJS Inc., a close economic adviser to Mr. Clinton; Robert Reich, a professor at Harvard University's Kennedy School of Government, who was at Oxford University with Mr. Clinton; Rob Shapiro, director of the Progressive Policy Institute, which produced many of the economic ideas in the Clinton platform; Alice Rivlin, former director of the Congressional Budget Office; and Robert M. Solow, of the Massachusetts Institute of Technology, a 1987 Nobel laureate.

Mr. Jordan also announced over the weekend the plan for a summit in Little Rock, Ark., with business leaders and economists. The meeting is likely to be more style than substance, but it was widely welcomed yesterday as reinforcing Clinton's claim to be a new-style Democrat.


John P. Cregan, president of the Business and Industrial Council, which represents 1,500 small and medium-sized businesses and which opposes major elements of the Clinton economic policy, said, "It's a spectrum shift in many ways.

"The fact [that] he wants to sit down and get the input of so-called business leaders is encouraging. He wants to assure the financial markets and the business community that he is a different kind of Democrat."

Another business leader, John Endean, vice president of the American Business Conference, a group of 100 chief executives of medium-sized, fast-growing companies, said, "We tend to see this conference as largely a symbolic effort to show the business community that he is ready, willing and able to listen, and I think that's good."

Prime among the concerns of American Business Conference members is the size of the federal deficit, which totaled a record $290 billion last year.

"To the extent that he has a mandate, he has a mandate to do something immediately," he added. "I guess we accept that and think it would be a good idea, but longer term, we would like to see him get a handle on the budget."

Thomas Schelling, a professor in the University of Maryland's economics department, said, "I think he is probably going to feel obliged to put in some economic stimulus, and he is going to have to find a way to rationalize the increase in the deficit. He has created the expectation."