The Outlook

The beginning of President Clinton's second term marks the triumph of a new economic orthodoxy in Washington.

Big tax cuts, which dominated Republican thought for two decades, went into retirement with Sen. Robert Dole. Public investment, the growth engine favored after Mr. Clinton's first election, has been consigned to the president's crowded attic of discarded ideas. Any tax cuts or investments in this year's budget will be too small to make a difference to national economic performance.

The new orthodoxy is public thrift. Although the president and his adversaries in Congress differ on how, they agree that the budget should be balanced, eliminating the government's "dissaving." "There is no economic argument on that," White House budget director Frank Raines says.

Moreover, important voices in the White House and on Capitol Hill advocate a restructuring of Social Security that would turn the federal government into manager of hundreds of billions of dollars in new savings. The result, advocates say, would be more national savings, which in turn would lead to more investment and ultimately more economic growth.

A long list of economic eminences -- grise and otherwise -- favor this approach, including Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert Rubin and his deputy Lawrence Summers. Mr. Summers has become a forceful advocate within the administration for a Social Security fix as a way for the president to make history.

Confirming the consensus, the business-backed Committee for Economic Development last week issued one report calling on the government to increase national savings by balancing the budget and soon will release another report advocating a boost in the payroll tax to finance individual Social Security savings accounts.

But will the push for public thrift really lead to faster growth? While faith runs strong, the evidence is hardly conclusive. Before the new orthodoxy goes too far, the arguments ought to be carefully examined.

Spurring economic growth has been at the center of the nation's public policy debates since the 1970s. Increased savings and investment have long been seen as the key.

How to spur savings and investment, however, is the subject of heated debate. Tax cuts have appealed to Republicans, in part because the cuts tend to benefit Republican voters. Public investment sounded good to Democrats, in part because it meant more Democratic-leaning public-sector workers.

But public thrift has little political appeal -- except on Wall Street, where bondholders would benefit from smaller deficits and brokerage houses itch to manage Social Security funds. For the remainder of the country, more government savings mean more taxes or less spending. That's a hard sell.

Advocates argue that economic growth depends on investment, and investment is financed by savings. At the moment, the government's heavy borrowing reduces the savings available for private investment. If the budget deficit is eliminated, the pool of available savings would increase by a third. If the government channeled more savings into Social Security accounts, savings could rise substantially more.

To bolster their argument, advocates look both to history and to other countries. The nation's growth has been strongest, they argue, when savings have been highest. And in general, foreign countries with high savings rates also have high growth rates.

The problem -- as is often the case in economics -- is that while high savings, high investment and high growth go hand in hand, its hard to tell which causes the others. There is no guarantee efforts to boost savings will necessarily lead to more investment or growth; and some critics, including Northwestern University's Robert Eisner, say it may lead to less.

More savings means less consumption, Mr. Eisner points out. If the government saves more, then people will have less to spend on, say, cars. Will that lead auto companies to invest more? Or less?

"It's just not clear to me that forcing people to consume less will increase investment," he says.

The global nature of today's economy also complicates the picture. The U.S. has been able to invest more than it saves in recent years by borrowing heavily from abroad. If savings increases, will that boost growth? Or merely turn overseas borrowing into overseas lending?

Still, experts who advocate public thrift believe the evidence that savings encourages growth is strong enough to make it worth a try. Moreover, there are other good reasons to both balance the budget and restructure Social Security.

The budget deficit has become a symbol of lack of discipline in government. Its rise has contributed to the general decline in public faith in political leaders. Getting it into balance is essential to restoring the public's faith in Washington, which in turn is essential to a strong nation.

Social Security is also suffering a crisis of sorts. Young people doubt the system will survive until they retire. Putting at least a part of their payroll taxes aside in accounts bearing their names would not only increase savings, but also boost confidence in the system.

The new orthodoxy, in short, may not be an economic cure-all. But it has a lot going for it.

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