NEWS ANALYSIS : Growth Plan Is a Gamble, With a Lot at Risk

WASHINGTON —  If Bill Clinton’s immediate economic priorities were ever in doubt, they are no longer: for the short term, he made clear Thursday, stimulating growth and creating jobs will take precedence over deficit reduction.

He also provided the clearest answer yet to the second big question about his economic strategy: how he would pursue his stimulus priorities without throwing nervous financial markets into a panic. He will commit himself immediately to a plan for “disciplined” deficit reduction over the long term and gamble that the commitment will reassure the markets enough to permit greater federal spending in the short term.

That could turn out to be among the most critical strategic decisions of Clinton’s presidency. Almost everything else he wants to do in the White House rides on the gamble.

If it works as he hopes and the markets give him some elbow room, the economy may rebound and the rest of Clinton’s ambitious agenda could become possible. If the markets fail to be convinced, the new President could begin his term with the economy heading into even deeper trouble than it is now.

Clearly, Clinton recognizes that world financial markets, if they conclude that he is going too far, could drive up interest rates and stall recovery. At the same time, he argues that unless he can spur the pace of growth the deficit can never be reduced and Americans cannot have a rising standard of living.

He also knows that progress will not be quick, even if his strategy works, and he sought to remind voters of that.

“I think the American people understand that these problems are of long duration and there won’t be any overnight miracles. But I think they expect aggressive and prompt action and I’m going to give it to them,” he said.

Clinton’s underlying priorities were clear in his choice of Harvard professor Robert B. Reich to coordinate economic matters on the transition team. To the markets, Reich equals government spending to boost long-term growth.

Reich believes that borrowing to invest in infrastructure improvement and education, job training and health care--what he calls “human capital”--will increase American competitiveness in the long term by attracting foreign and domestic investment capital.

But Clinton did not completely abandon the so-called “deficit hawks” who contend that balancing the federal budget should be job No. 1. “We have to have a clear plan for deficit reduction over the next four years,” he said Thursday in answer to a question about setting priorities.

Economists found few surprises in Clinton’s comments at his press conference and financial markets accepted them with equanimity. The stock market closed virtually unchanged and bond prices rose slightly.

“He gave the impression it will be a slow and deliberate process as opposed to a rush job. He said the right things about keeping things in balance,” said Samuel D. Kahan, chief economist for Fuji Securities. “He referred to increasing the investment tax credit and spending on infrastructure but with a disciplined reduction of the deficit. The financial markets will obviously like that. Whether he will keep his word, time will tell.”

While several other economists had similar words of mild praise for the program Clinton outlined Thursday, Lawrence A. Hunter, chief economist for the U.S. Chamber of Commerce, was skeptical.

“I have a problem with Reich and his industrial policy proclivities. He’s smart--but not smart enough to outguess the market,” Hunter said.

He was critical of the incoming Administration’s plan to increase spending immediately and defer deficit-reduction efforts until later. He said that Clinton’s investment tax credit proposal is “orders of magnitude too anemic” and smacks of steering federal dollars to a handful of favored industries.

Cynthia Latta, an economist at the Boston forecasting firm of DRI/McGraw-Hill, said that Clinton’s announcements are largely in line with the firm’s own projections. She said that the combination of business tax cuts and infrastructure spending would increase the federal budget deficit by $15 billion next year and $18 billion in 1994. By 1995, she said, the cost would shrink as the program began paying for itself in increased economic activity.

In his press conference Thursday, Clinton said that he is working on a short-term economic agenda as well as a long-term plan to increase productivity, create jobs and raise living standards. For short-term stimulus, the President-elect wants more federal spending on things like highways and airports, plus special tax credits to encourage business to expand.

His first move will be to propose an investment tax credit for businesses that buy new machinery and expand their factories. Clinton contends that the tax credit will result in the creation of 500,000 new private sector jobs in the first year.

Aides have circulated a study by Lawrence H. Meyer & Associates of St. Louis which concludes that an investment credit like this would cost $13 billion in the first two years but would pay for itself by stimulating increased demand in the economy.

Clinton also announced that he plans billions of dollars in “investment”--the President-elect prefers that term to “spending”--in a variety of “road projects, water projects, other projects of that kind” to improve the nation’s infrastructure and spur employment.

Clinton dodged a question about how much he plans to spend on these public works projects, although he has said that it would be at least $20 billion a year. Some of his advisers have advocated public spending as high as $50 billion a year.

Clinton took pains to signal that his stimulus package would not preclude diligent efforts to trim the federal budget deficit. But, he said, the only way finally to bring the budget into balance is through a growing economy.

“I think if you look at this anemic growth, the anemic employment, the anemic tax receipts, you’re never going to get to a position where the budget is in balance unless you can grow the economy,” Clinton said. “But, on the other hand, to ignore the deficit is a great mistake. So I’m going to pursue my course, which is increase investment, gradual but disciplined reduction of the deficit, and we’ll see if it works.”

During the campaign, Clinton and his advisers insisted that his program would not do anything to increase the size of the federal deficit, even in the short run.

Clinton argued that his program of increased federal “investment spending” in public works and his proposal for a tax credit to spur business investment and job creation would be fully financed by offsetting spending cuts in defense and other programs, higher taxes on the wealthy, tougher enforcement of taxes on foreign corporations and more rapid economic growth.

Clinton did not spell out what measures he is prepared to take if his economic stimulus program does not yield the expected growth and reduction in the deficit. He likewise was vague about whether he would follow through on a campaign promise of tax relief for the middle class.

Times staff writer James Risen in Little Rock contributed to this story.