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Second-Term Challenges Await President

By Steven Pearlstein
Washington Post Staff Writer
Thursday, November 7, 1996; Page A23

How do you build a Bridge to the Future using recycled materials and cheap parts?

That's the challenge facing President Clinton as he tries to turn this year's electoral victory into next year's economic policy.

With the president's economic team due for a thorough housecleaning — Commerce Secretary Mickey Kantor already is said to be leaving and there likely will be a new secretary of labor, a new director for the National Economic Council and a new chairman of the Council of Economic Advisers — the policy planning process has been on hold for the past several months.

But in conversations over the past month, the president's crop of economic advisers predicted that Clintonomics II would look something like this:

  • Balanced budget. The administration's aim is not only to balance federal spending and receipts by the year 2002 but also to end the trench warfare over the budget that has so dominated economic policy-making during the past two years. And this time, Clinton will go into the budget battle wielding a powerful new weapon handed him by Republicans: the line item veto.

    A key budget issue is what to do with Medicare, the giant health insurance program for the elderly that is slated to run out of money in the year 2001. The administration is likely to propose some short-term fiscal fix, while referring the more difficult questions to a blue-ribbon commission.

    As for a companion commission on a long-term fix for Social Security, the odds are only 50-50 that the White House will move ahead next year. That one could wait until 1998.

  • Taxes. Clinton intends to make good on his campaign promises to offer middle-class families a $500-per-child tax credit and to exempt homeowners from the capital gains tax when they sell their principal residence at a profit. Both proposals already have Republican support.

    Despite the serious misgivings of administration economists, Clinton's campaign promise of a $10,000-a-year tax deduction for college tuitions has proved popular among voters and with members of Congress, and will be a centerpiece of the 1997 agenda. Look for some fine print, however, designed to prevent colleges from trying to expropriate the federal largess by raising their tuitions.

    And later in the year, when the budget negotiations with Congress get down to the final round, look for the president to propose reducing the gap by closing a long list of corporate tax loopholes.

  • Welfare reform. The president wants to do something to help states with the "hard cases" — welfare recipients without the education and work experience to find jobs. Offering tax credits to businesses that hire welfare mothers, as the president has proposed, might help some. But initial experiments, such as those involving Manpower Inc. and Marriott International Inc., have found that many of the participants lack the basic workplace skills to hold on to the jobs.

    "The best of these programs are extremely expensive and have only modest effect," said one Clinton adviser. "Most simply fail."

    Good ideas are still being accepted.

  • Health care. Budget pressures will make it impossible to realize the president's goal of ensuring health insurance for all American children — it's very expensive and would encourage even more employers to pull back from full family coverage. Instead, the president is likely to propose extending Medicaid coverage to families of the unemployed.

    Separately, an administration panel soon will come up with tough new quality standards for health maintenance organizations and other managed-care plans. That should play well with health-care providers as well as consumers, both of whom resent some of the heavy-handed cost-saving tactics of the health plans.

  • Trade. Topic A for next year is China. The administration has given up even the appearance of trying to use the threat of trade sanctions to force China to clean up its record on human rights — that approach was a miserable failure. Now the concern focuses on China's emergence as a huge economic powerhouse that doesn't play by the global rules on free trade. One manifestation of that is the growing annual U.S. trade deficit with China, which will soon surpass the deficit with Japan.

    Over the next year, the administration will try to gently nudge China to move more aggressively to a free-market economy in return for U.S. sponsorship of Chinese membership in the World Trade Organization, which Beijing is seeking. The negotiations focus on the myriad of regulations that effectively limit what foreign companies can sell and do in China.

    As a short-term step, the president may seek private assurances from Beijing that government-controlled enterprises will increase purchases of U.S. capital goods as a way of narrowing the trade gap and undercutting political opposition to trade liberalization with China, particularly from organized labor.

    Still very much up in the air is whether Clinton will try to get "fast-track" negotiating authority to expand the North American Free Trade Agreement by including Chile. Trade officials argue that a Chile deal is important to reaffirm the U.S. leadership position on free trade. But political aides warn that this is no time to kick sand in the face of anti-NAFTA forces in organized labor, which went all out for Clinton in the presidential campaign.

  • Technology research. This is a long-standing priority not just for Clinton but also for Vice President Gore; both think it is the secret to boosting the economy's long-term growth rate. Most initiatives were put aside two years ago when Republicans captured Congress and began agitating for elimination of the Commerce Department and an end to government efforts to steer private-sector research and development. But with Republican ideologues now chastened and Commerce safe, look for a joint R&D push by Clinton and the business community to revive these efforts.

  • Utility deregulation. If you liked the decade-long squabble over how and when to deregulate the telecommunications industry, you'll love this one. Many states already have opened the electricity grid up to competition but the process threatens to bankrupt some traditional utilities while creating large pools of winners and losers among electric customers and shareholders.

    Look for a Clinton proposal to bring some order to the process and a flood of corporate political giving as all sides maneuver for advantage.

  • Displaced workers. With the national unemployment rate running at its lowest level in 20 years, this may not be an immediate priority. But should the economy turn sour, look for Clinton to whip out a package of relief for the unemployed: subsidized health insurance coverage; public works jobs to rebuild the inner cities; a single grant to replace the current myriad of training programs; closing loopholes in the unemployment insurance program, which covers only 30 percent of U.S. workers; and legislation allowing the unemployed to borrow from their pension plans and individual retirement accounts.

    The common thread running through this list of initiatives is that they can be accommodated within the context of a balanced budget and win support from a Congress that has become wary of hard-edged ideology.

    In addition to these items, several aides predicted the president would try to recapture a measure of idealism and moral authority for his administration with a renewed commitment to revitalize the inner cities and lift the prospects of a growing and increasingly desperate underclass.

    Given the failure of past government efforts in this area, the president would be careful to classify this initiative under the heading of urgent experimentation. At the same time, he has been stung by criticism from former allies that he has lost his social conscience and wants to balance the record by keeping the issue before the public. Treasury Secretary Robert E. Rubin of New York City also is keen on the idea of an urban agenda.

    "Remember, this is a president who thrives on big missions," said one aide. "And right about now he's anxious to find one."

    © Copyright 1996 The Washington Post Company

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