Fuel for the locomotive

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WHEREAS George Bush spoke of a 'New World Order', the newly inaugurated President Bill Clinton speaks of a world economy, world problems and world solutions. This more than anything else illustrates the transfer of generations in US decision-taking. There are no Cold War hangovers in Mr Clinton's intellectual repertoire.

In his inaugural address last week, he spoke of the US not in isolation but as a primary generating unit in the global economy and on the world stage. Thus his early decisions on whether to take 'pain and sacrifice' up-front, with a big deficit-reduction programme, or whether to go for short-term stimulus, must be viewed in this context.

One of the main reasons that Mr Clinton is reportedly considering a short-term stimulus that would further widen the US deficit is his desire to send a signal to the world that the biggest locomotive is still on track. This he would do by ensuring that the blooming US recovery does not wither and die. Proposals under consideration are, as promised during the campaign, an investment tax credit and other possible tax cuts in addition to spending increases for social programmes that would add up to a dollars 20bn-dollars 30bn ( pounds 13bn- pounds 19.5bn) stimulus programme.

A big worry domestically, despite continuing signs of recovery, is the lack of substantial job creation. Traditionally, in times of 'normal' recovery, more than 200,000 US jobs are created each month. But for the entire 11 months of last year, excluding December data not yet reported, only 318,000 private-sector jobs were added to the economy. Simultaneously there was a big upsurge in temporary jobs. Even as US companies reported healthier profits, the structural changes associated with industry-wide job redundancies continued.

However, this does not mean that the Clinton team has given up on deficit-reduction. For the first time, in his inaugural address, Mr Clinton used the word 'sacrifice' to illustrate the hard choices that the country faces. If he follows present plans, Mr Clinton will unveil simultaneously with his short-term stimulus programme, an ambitious medium-term deficit reduction strategy that will include a comprehensive energy-consumption tax plus big cuts in government benefits. A VAT to pay for specific programmes, such as health-care reform, is also under consideration.

Both the new Treasury Department staff under Secretary Lloyd Bentsen and the Office of Management and Budget under former Congressman Leon Panetta, a self- declared deficit hawk, are well along in the planning process. In addition, based on very preliminary comments from the new team at the State Department, it appears that it, too, plans to play a much larger economic role. The Congressional Budget Office is to release its new deficit projections this week but already there are warnings that by fiscal year 1997, when Mr Clinton hopes to slice the deficit almost in half by dollars 150bn, it will exceed dollars 385bn under present policies.

The big unknown is trade. Although there are many unfilled senior jobs throughout the Administration, the appointments that have been made on the trade side give cause for concern. There is not one self-avowed free-trader among them. Laura D'Andra Tyson, nominated as the head of the Council of Economic Advisers, describes herself as a 'cautious activist'. 'It is no longer a free trade game,' she said. Mickey Kantor, nominated as the US Trade Representative, has spent most of his career representing corporations and industry special interest groups.

In his confirmation hearings, he said that he would not automatically assume that the world is governed by free and open trading policies nor that he should avoid activist policies.

Similarly, Ron Brown, nominated as Secretary of Commerce and the leading architect of US competition policy, has very close ties to the industry groups that he has represented. Already many of the most powerful US industries are queuing up for protection in the belief that the Clinton Administration's stress on competitiveness will lead to this approach.

The dearth of self-proclaimed free- traders does not automatically suggest a new era of US protectionism. Indeed, Ms Tyson is the first to state that she is not a protectionist and does not intend to become one. But she is a believer in managed trade, particularly in the critical, hi-tech industries. Mr Kantor's preliminary remarks suggest that he, too, is in this camp. It would be unfair to give the impression that this is all bad or removed from the realities of the international market place, where 'managed trade' has become relatively commonplace.

The US has steel agreements with Europe, motor car agreements with Japan and other nations, textile and other import restrictions. As Eisuke Sakakibara, a top Japanese finance ministry officer, commented recently: 'Quite a significant portion of trade between the US and Japan is now being managed.'

So far the world has been able to live with these developments, but the danger is that they will be carried too far; that 'cautious activism' will become outright protectionism and a 1930s-like miasma will settle over all. Not a good legacy for the first Democratic administration in 12 years.