A TILT TOWARD THE RICH?

By John Greenwald

IF THE U.S. ECONOMY IS THE ENVY of the world, why rush to balance the budget when that might widen America's great divide between rich and poor?

They were sitting side by side, but Laura D'Andrea Tyson and Pete Domenici were worlds apart on the issue. How it's resolved in Washington's budget showdown will affect almost every American. "This is too much too fast," said Tyson, who argued that the Republican plan to balance the budget in seven years favors the wealthy. But Domenici looked at the same picture through a different lens. Without bold and rapid cutbacks, he contended, middle-class Americans will be saddled "for a long, long time to come with the hidden tax of having to pay the interest on the national debt and ultimately pay off the debt. And that is the most significant impediment to a higher standard of living."

Bill Clinton's chief economic policy adviser and the chairman of the Senate Budget Committee, who debated at a TIME forum of leading economists and policymakers earlier this month, highlighted the warring assumptions in the budget battle raging in Washington. The most important issue in the fight, which is sometimes lost amid all the talk of train wrecks and debt ceilings, is whether the Republican budget cuts will needlessly hurt the poor and the working class and thereby deepen divisions in an already polarized economy. While all sides agree that the budget must be balanced--Clinton contends that the effort should be stretched over the next seven to 10 years--the Administration insists that the Republican strategy of slashing social programs from health care to job training will worsen the income gap. Says Tyson: "These proposals are going to exacerbate the major problem affecting the country right now--the stagnation and decline in the earnings ability of at least 40% of the population."

The forum left little doubt that Clinton plans to capitalize on the wage-gap issue in the 1996 elections. Declared Labor Secretary Robert Reich: "Income inequality and the decline in median wages will be major campaign themes" for the President. But conservatives think that the budget-balancing plan will boost the economy and that they'll get the credit. Said Stephen Moore, director of fiscal-policy studies for the conservative CATO Institute: "If Democrats talk about redistributing income and Republicans talk about economic growth, the Republicans will win."

Yet the economy is already perking along. After more than four years of expansion, it is growing at a sustainable rate of around 2.5%; inflation remains under control, and unemployment is a moderate 5.6%. Allen Sinai, chief economist for Lehman Brothers Global Economics, predicted "at least another two or three years of expansion and probably the best U.S. business cycle ever." Moreover, he added, the healthy economy will be "absolutely an A-plus" for Clinton in next year's election.

Republicans insist, however, that the economy needs a balanced budget in seven years, even if it causes pain. "The major, major difference between the President's budget and ours," Domenici said, "is the almost total lack of restraint on entitlements in the President's [program]." Concurred David Wyss, the chief financial economist at DRI/McGraw Hill: "If you do not get those cutbacks in entitlement programs, you're not going to get the budget balanced or keep it balanced."

But Tyson charged that the G.O.P. must take a meat ax to social spending largely because it wants to hand out $245 billion in tax breaks to beneficiaries that include large corporations and wealthy individuals. "You do not have to put 9 million people at risk in Medicaid-program coverage if you are not trying to finance the tax cut," Tyson said. The tax cuts, she argued, would mostly fail to help "the population that has basically not participated in much of the prosperity in the past two years."

Tyson pointed out that the Clinton Administration has already brought down the deficit sharply. Thanks largely to the long-lasting economic expansion, as well as tax increases and spending cuts that Congress enacted in 1993, the deficit has fallen from $290 billion just before Clinton took office to about $190 billion this year.

The Republicans and Democrats on the TIME panel clashed over proposed congressional cutbacks in federal education and job-training programs. Reich insisted that such efforts were essential to helping unskilled workers catch up to their better-paid brethren. Said he: "Every year of postgraduate education or job training generates an increase of anywhere from 6% to 12% in incomes." Retorted Domenici: "Most people who deal with the training of American workers admit that most of the government's programs do not work."

Despite the partisan positions, the Republican plan and the Administration's counterproposal have a lot in common, some of it good and some of it bad. "Both packages would create genuine fiscal discipline," said Rob Shapiro, director of economic studies at the Progressive Policy Institute and a close adviser to Clinton during his 1992 campaign. Shapiro noted that projections of how long it will take to balance the budget are "notoriously unreliable. What really matters," he said, is that "we are at last on a responsible road."

Even so, both parties are ignoring some grievous social woes, said Margaret Simms, research director for the Joint Center for Political and Economic Studies in Washington. "Central city locations," she said, "have clearly borne a disproportionate share of job stagnation and income inequality." Simms added that Republican plans to cut education funds would deal a blow to inner cities, even though such money amounts to just 6.5% of all public spending on schooling. The federal funds "have to do with targeting programs for the disadvantaged," Simms said. "If you remove that money, then what happens?"

And both parties, the TIME panelists agreed, are still tolerating huge amounts of corporate welfare that cost taxpayers billions of dollars a year. Said Shapiro: "Even a small cut in the ethanol subsidy [which supports processing of corn for alternative fuels] was beaten back in the House, and that is one of the most egregious ones."

If Clinton exploits class warfare next year, it could spell trouble for another looming proposal: overhauling the income tax system. Said Domenici, who has offered his own plan for doing just that: "Total reform of the tax code is going to be a political issue in the next campaign." Moore contended that the simplicity of the 17% flat tax proposed by House majority leader Dick Armey gives it broad appeal despite the fact that many middle-class earners would wind up with higher tax bills because of the removal of deductions. But Reich saw little future for the plan. "When the middle class discovers that its taxes will go up," he said, "that is the end of all discussion of a flat tax." That figures. In an age of income inequality, people don't want to be any more unequal than they already are.