h:\econplan\clinton\part2.txt

                           A Legacy of Failure

Raised in unrivaled prosperity, we inherit an economy that is still the
world's strongest, but is weakened by business failures, stagnant wages,
increasing inequality and deep divisions among our own people.

Bill Clinton


The election of 1992 was a mandate for change and no wonder. Twelve years
of neglect have left America's economy suffering from stagnant growth and
declining incomes. They have left the average American family worried
about its future, working harder, and getting less in return. The specter
of rapidly rising health care costs threatens every family and business.
They have left a mountain of debt and a Federal Government that must
borrow to pay more than a fifth of its current bills. Perhaps most sadly,
they have left the great majority of our people no longer dreaming the
American dream. Our children's generation may be the first to do worse
than their parents.

Such is the sorry legacy of 12 years of short-sightedness, mismanagement,
and protection of the privileged. All of this must be changed.


Anemic Recovery from Recession

The U.S. economy grew very slowly in the late 1980s and slid into
recession in the summer of 1990. Sales and profits fell. Unemployment
rose. The National Bureau of Economic Research says that the recession
ended in March 1991. For most Americans, however, the recession has not
ended. The great American job machine has ground to a halt, and the
unemployment rate is higher than it was at the recession's official end
(Chart 2-1). The fraction of the unemployed who have permanently lost
their jobs is near its record high (Chart 2-2).

The 1991-93 recovery has been called a "jobless" recovery a description
that is all too apt (Chart 2-3). The reason is simple: few new jobs have
been created because production has grown so slowly (Chart 2-4). Until the
last two quarters, this was not a recovery worthy of the name. That is the
first thing we must change.

In a strong, durable recovery, people go back to work in great numbers,
and are able to earn the incomes they need to buy the goods and services
that economic growth produces. The increase in sales stimulates
investment, and thus generates still more jobs. The process sustains
itself until the economy is producing at its full capacity and the labor
force is fully employed.

Recently, however, recovery has been slowed by powerful forces that are
reducing the numbers of jobs. Key industries are laying off workers to
become leaner and more competitive. The defense sector is downsizing to
reflect the new realities of the post-Cold War world.

Already we have seen the recovery process begin twice, only to sputter
when early signs of growth were not followed by solid gains in employment.
Now, once again, the long-dormant American economy seems to be waking up.
This time, we must be absolutely sure that the recovery is strong enough
and durable enough to put Americans back to work. The stimulus component
of the Clinton economic program is an insurance policy designed to make
sure that the recovery does not falter again. It is also a downpayment on
the long-term investments that will encourage lasting economic growth.


Stagnating Productivity and Living Standards

But mere recovery from recession is not good enough if we return to the
trickle-down policies of the 1980s. America's economic problems are deeper
than a temporary lull in economic activity. We must aim not only for more
jobs, but also for better jobs at higher wages. We must aim not only to
produce at our current capacity, but also to add to our economy's capacity
to create a better life for all.

The productivity of American labor what an average worker produces in an
hour has been growing at an agonizingly slow pace for about two decades.
In turn, real wages have stagnated (Chart 2-5) and family incomes have
advanced at a snail's pace. These developments, more than anything else,
explain why the American dream is fading for the average worker.

Even a small improvement in a nation's productivity growth rate can yield
much higher standards of living in the long run. Had real hourly
compensation grown at 2.0 percent a year since 1973, instead of the actual
0.7 percent gain, average American workers would make almost $5.00 per
hour more (Chart 2-6). Increasing productivity growth will have a direct
and positive impact on living standards. We simply must do better.


Underinvestment and Slow Growth

The slowdown in productivity growth is partly mysterious, even to experts
who have studied it for years. But no one doubts that part of the cause is
that as a nation we have underinvested: in private business capital, in
public capital, and in "human capital" the skills and capabilities of the
American workforce.

Chart 2-7 shows that the United States devotes a smaller fraction of gross
domestic product (GDP) to business investments than do the other major
nations with whom we compete in the international marketplace. Chart 2-8
shows that American governments at all levels have been spending a
decreasing share of our total resources on civilian public investment
including both physical investment and the research and development that
underpins future growth. Studies indicate that additional investment in
private and government R&D, and in public infrastructure, could yield
substantial economic benefits.

We have also underinvested in education and training. American students
routinely score far below their counterparts in other industrial countries
on tests of mathematical competence and scientific knowledge. Moreover,
recent evidence also suggests that the demand for more highly trained,
better-educated workers has been outrunning the supply. Chart 2-9 shows
that the wages of college graduates have advanced far faster than those of
high school graduates since 1978; similarly, the wages of high school
graduates have risen faster than the wages of nongraduates. These growing
wage gaps indicate that the financial returns to education have been
rising.

This evidence suggests that more investment is vital to raising the growth
rate of productivity and boosting living standards. We must invest more in
business capital, in public infrastructure, and in the skills of our
people. Our future has been shortchanged for too long. We owe it to our
children to change course now. The Clinton program will do precisely that.


The Alarming Rise in Inequality

Throughout the 1980s, slow growth in living standards was accompanied by
growing inequality. The rich got richer while the middle class paid more
in taxes and fell further behind. In fact, income gains were so
concentrated that people at the bottom of the income scale actually lost
ground: measured in inflation-adjusted dollars, their incomes fell between
1977 and 1991. The rising staircase in Chart 2-10 depicts a simple but
doleful message: During this period, the richer you were, the better you
did.

Behind these statistics lay very real problems. Middle-class families grew
disillusioned and cynical while they worked longer hours but had trouble
making ends meet. Tens of millions of families lived in fear of losing
their health insurance; 37 million had none at all. The working poor were
forced to choose between feeding their children and heating their homes.
Hopelessness bred violence in America's inner cities. The nation drifted.

It is time to reverse that drift and reorder our priorities. It will
require those who have profited to bear the greatest burdens and do right
by the people who work hard and play by the rules. Our economic plan will
redress the inequities of the 1980s.


A Government That Doesn't Pay Its Way

For more than a decade, the Federal Government has been living well beyond
its means spending much more than it takes in, and borrowing the
difference. The annual deficits have been huge, both in dollars and as a
percent of GDP (Chart 2-11). As a result of all this borrowing, the
Federal debt has grown as a percentage of GDP since 1981, reversing three
decades of decline (Chart 2-12).

The Federal deficit is currently swollen by two temporary factors. One is
the recession, which has reduced revenues and increased expenditures to
aid those adversely affected; the other is increased borrowing for the
savings and loan cleanup. Even when these temporary factors are behind us,
however, a large structural deficit will remain. The structural deficit
the deficit that would be there even if the economy were producing at full
capacity and the savings and loan cleanup were complete was 3.4 percent of
GDP in 1992. The really bad news is that the structural deficit not only
will remain but will grow even faster than the economy unless the
Government changes course.

The problem of the structural deficit is rooted in the early 1980s, when
we cut income taxes and massively increased defense spending. Subsequent
tax hikes in particular, large increases in regressive payroll taxes and a
slower growth of defense spending during the second half of the 1980s
temporarily halted the growth of the structural deficit. Nonetheless, the
structural deficit remained huge by historical standards, and it once
again began to climb relative to GDP by the early 1990s. Without a real
deficit reduction program, the structural deficit will exceed 4 percent of
GDP by 1997, rivalling the highs of the mid-1980s, and it will grow at an
accelerating rate as a percent of GDP.

At first glance, slowly growing revenues and rapidly rising outlays, both
aggravated by the economy's slowdown during the last two years, appear to
be responsible for our deficit problem. Correcting for these recession
effects, the share of Federal revenues in GDP is 0.5 percent less than it
was at the beginning of the 1980s, while the share of Federal outlays has
increased by 1.1 percent. These trends in total revenues and outlays,
however, mask some important changes in how the Government raises its
revenues and spends its money.

Major reforms of the Social Security system in 1977 and 1983 sharply
raised taxes, stabilized benefits as a percentage of total Federal
spending and caused an accumulation of large surpluses in the Social
Security trust fund. But taxes to support the rest of the Government's
activities have been cut by as much as Social Security taxes have been
raised.

Adjusting for cyclical effects, the share in GDP of revenues to support
the Government's other spending programs has actually shrunk by about 1.5
percentage points since 1980. And the surpluses in the Social Security
fund have been used to fill the gap. Instead of adding to national savings
to fund the retirement of the baby boom generation early in the next
century, these surpluses have camouflaged the true imbalances in the
Government's revenue and spending streams. Consequently, if we do not
change course and revitalize our economy, redeeming the IOUs held by the
trust funds will require major tax increases when the baby boom finally
retires.

While Government spending has increased, its composition has changed.
After a sharp increase in the first half of the 1980s, defense spending
currently accounts for about 22 percent of total Federal outlays, down
slightly from its 1980 share. Spending on non-defense discretionary
programs has fallen sharply, from about 24 percent of total spending in
1980 to about 17 percent today. During the same period, public investment
by the Federal Government measured as the sum of outlays for non-defense
physical capital, non-defense R&D, and education and training has fallen
from 8.2 percent to 6.3 percent of total outlays.

In contrast, health care Medicare and Medicaid and interest payments on
the debt have claimed increasing shares of total spending. Between 1980
and 1992, spending on Medicare and Medicaid rose from 7.8 percent to 13.3
percent of total government spending. To make matters worse, large annual
deficits, together with high interest rates for more than a decade, have
swollen net interest payments on the debt. Interest payments now amount to
almost $200 billion a year. About three-quarters of the money the
Government borrows this year will go to pay interest on the debt piled up
from previous years.

Unless there are meaningful changes in policy, sharp continuing growth in
health care costs and self-perpetuating growth of interest on the debt
will overwhelm projected revenue growth and cuts in defense spending. The
Federal deficit will continue to balloon out of control unless we change
course.


Why Deficits Matter

Deficit reduction is not an end in itself. It is a means to the end of
higher productivity, rising living standards and the creation of high-wage
jobs. In short, it is about securing a better economic future for
ourselves and, even more importantly, our children.

Huge structural budget deficits are harmful for a simple reason: when the
economy is not in recession, each dollar the Federal Government borrows to
finance consumption spending absorbs private savings that would otherwise
be used to increase productive capacity. Large, sustained budget deficits
mean that we must either reduce our investment at home or borrow the money
overseas.

This drain on our savings has caused anemic domestic investment,
especially in comparison with most other advanced industrial countries
(Chart 2-7). It has retarded growth in productivity and living standards.
Meanwhile, borrowing from the rest of the world to maintain investment at
even today's depressed levels has increased interest payments to foreign
lenders. In effect, we have signed over some of the fruits of today's
productivity-enhancing investments to the children of Europe and Japan,
rather than preserving them for our own.

Regardless of whether the debt is owed to foreigners or U.S. citizens, the
interest obligation requires higher taxes. Moreover, our skyrocketing
interest costs squeeze out revenues that would otherwise be available for
other priorities. Since 1988, for example, net interest alone has risen by
$50 billion, making interest payments the fastest growing Federal
"program." This mounting interest burden mocks our efforts to fund token
initiatives for pressing social needs: next year's projected increase in
interest payments by itself could fully fund the Head Start program five
times over.

As a result, the nation has suffered from another deficit the deficit in
public investment in education, training, infrastructure, and civilian
technology. Like private investments, well-chosen public investments raise
future living standards. Deficit reduction at the expense of public
investment has been and will continue to be self-defeating. The Clinton
plan is explicitly and emphatically aimed at reducing the deficit while
increasing much-needed public investment. One without the other will not
work.

Beyond the quantifiable benefits of deficit reduction greater investment
and economic growth are unquantifiable but no less important benefits.

First, deficit reduction could allay anxiety in financial markets. Large
and growing structural deficits could destabilize global capital markets
because of the growing drain of government borrowing on available funds.
Such anxieties help explain why historically high long-term real interest
rates persist despite a weak economy. The threat that the United States
might ultimately inflate the dollar to depreciate its runaway debt
obligations raises the specter of a spike in interest rates, a collapse of
the dollar, or both.

Second, a credible effort to reduce our structural deficit will improve
our ability to coordinate macroeconomic policies with our major trading
partners, who are concerned about our deficit's drain on global capital
markets. Putting our fiscal house in order will improve our leverage in
international negotiations.

Finally, deficit reduction will help break legislative gridlock and
reverse public cynicism about government. Large deficits have virtually
assured that each legislative session has been dominated by the deficit
debate, encouraging budgetary quick fixes that have shortchanged the
nation's long-term public investment needs and created a deficit of trust.


Skyrocketing Health Care Costs

Another legacy of the past 12 years is the crisis of rapidly escalating
health care costs a crisis that threatens the security of every American
family and business. In 1992, Americans spent $840 billion on health care,
or 14 percent of GDP compared with about 9 percent of GDP only a dozen
years ago (Chart 2-13). At this rate health spending will reach an
astonishing 18 percent of GDP by the year 2000: Americans will be devoting
almost one dollar of every five they earn to health care, and the average
family's health costs will rise to almost $10,000 a year.

Rising health care costs are straining the budgets of families,
businesses, and government. They are eating up incomes and squeezing out
other spending. Individuals are facing soaring insurance premiums and
rising out-of-pocket bills. Skyrocketing premiums have forced many
businesses to drop or curtail health coverage for their workers, swelling
the ranks of the uninsured. More than 37 million people do not now have
insurance coverage. Many are dependent on hospital emergency units for
care.

Inflation in health care costs is also robbing government budgets of
scarce resources needed for critical investment in our future education,
job training, infrastructure, and technology development. If current
trends continue, by 1998 the Federal Government will spend one in every
four dollars on health care (Chart 2-14). State and local spending for
health will rise over the same period from 14 to 18 percent of total
outlays. Exploding health costs threaten funding for other public
priorities.

The rise in health care costs now projected will consume between 25 and 35
percent of total projected GDP growth for the rest of the decade and will
account for over 40 percent of the total increase in Federal spending. In
short, containing health care costs has become an economic imperative.
Indeed, the potential "health dividend" is far larger than the peace
dividend promised by the end of the Cold War. If America spent the same
share of GDP on health as our main international competitors do, last year
alone we would have had $230 billion more to invest in our people.
Similarly, if spending by employers on health insurance had remained at
the 1980 percentage of total compensation, cash wages for the average
worker could have been $670 a year higher in 1991 without affecting
corporate profits.

Despite these bleak statistics, widespread evidence suggests that we can
control health care costs and maintain quality. Other advanced industrial
nations have levels of health spending substantially below ours and have
controlled cost growth more successfully even while providing care that
matches and often exceeds our own. Their success offers a strong basis for
hope as we step up to the challenge of fundamental change.


A Government That Doesn't Work Well

Finally, it is clear that the American people have lost confidence in
their government. They believe that government has gotten too big, that it
is out of touch with its citizens, that it wastes money, that it is
ill-equipped for taking on the country's problems or, worse, that it
causes those problems and hears only the voices of the privileged few.

In too many cases they are right. We cannot deny the evidence.

 *   Billions of taxpayers' dollars have been lost to fraud and abuse. The
     worst examples scandalous military purchases, sweetheart deals, the
     saving and loan debacle, and abuse of government perks have made
     headlines, but many remain hidden. We must crack down on these hidden
     scandals and catch problems before they occur, not after.

 *   Millions of Americans every year must deal with the maze called
     "Federal bureaucracy." The American people deserve a government that
     treats them like customers, by giving them more choices and stripping
     away unnecessary layers of management and red tape.

 *   The size and cost of the Federal Government has grown over the past
     twelve years. Despite many promises, administrative costs have
     increased and special perquisites for high-level officials have
     proliferated. That is why we have already made real cuts in the
     Executive Branch and will do so over the coming years.

Our political system has failed to address many of the most urgent
problems facing the American people health care, declining incomes, job
loss, budget deficits. A large part of the blame must go to the lobbyists
and special interests who profit from the status quo. All too frequently
they control the agenda or use their campaign contributions to dominate
the debate. Even as government did less, the ranks of the special
interests grew. By the decade's end, some 80,000 people will make their
living pleading the causes of the special interests. To break the
stalemate in Washington, we must attack the problem at its source:
entrenched power and money.

The Clinton Administration is determined to meet a double challenge.
First, we must cut the waste and make government operations more
responsive to the American people. It is a time to shift from top-down
bureaucracy to entrepreneurial government that generates change from the
bottom up. We must reward the people and ideas that work and get rid of
those that don't.

Second, we must restructure government to deal with new realities, both
foreign and domestic. Our defense and foreign affairs agencies must be
reorganized to reflect the new problems of the post Cold-War era and the
global economy. We must also reinvent our domestic agencies to serve us
more effectively in the twenty-first century.

Public cynicism about government is not merely a political problem. Making
our government more responsive and improving the way it works is essential
to the future of our children and our democracy.


The Price of Not Changing

Reversing the legacy of the last twelve years will not be easy. Nor will
it happen overnight. But the cost of clinging to the status quo will be
born by every family and by our children and their children. Consider:

(1) If we do not change, we could continue to have epidemics of measles
and other preventable childhood diseases; if we find the courage to
change, we could immunize every child.

(2) If we do not change, a college education could become the domain of
the privileged; if we find the courage to change, hundreds of thousands of
Americans could go to college in exchange for national service.

(3) If we do not change, health care costs will continue to terrorize our
families. If we find the courage to change, all Americans can have
affordable quality health care.

(4) If we do not change, the deficit will continue to grow and incomes
will stagnate. If we have the courage to change, we can have a higher
standard of living and a government that pays its way.

The stakes for every American's standard of living are enormous. From
World War II to the early 1970s, we grew more productive year by year and
our standard of living doubled. At today's anemic rate of growth, our
standard of living will no longer double every generation but once every
100 years. If we do not summon the courage of change, our legacy will not
be worthy of the nation we have inherited.

Continuing the failed policies of the past twelve years is a choice
without a future. To restore our nation's economic vitality and reclaim
our vision of America, we must change course. And we must do it now.