Clinton Economic Plan Is Not at Odds With the Past

A word to the wise. To succeed in the present, ignore the misleading arguments of the past. A lot of what is being said about President Clinton’s new economic plan and the contrasting policies of the 1980s is off the mark.

On taxes, to begin with: The intent of the 1986 Tax Reform Act was to make the tax code neutral--applied without favor for any particular industry. But the consequences were otherwise. The ’86 act hit high-tech and heavy industries with a $120-billion tax increase, while reducing taxes for consumers and businesses such as retail stores and restaurants. Such companies invest relatively little in capital equipment but do hire a lot of labor.

Now Clinton is reversing that policy with investment tax credits to benefit firms that spend heavily on capital equipment and on research and development--including the pharmaceutical companies that he criticizes in other contexts.

Computer makers, for example, will get tax credits for their own spending on machinery and R&D;, and their customers will get a similar 7% break for investing in new computers, explains Paul Greenwald, research director at Mitchum, Jones & Templeton, a Los Angeles investment firm.

The bonanza is limited, to be sure--investment credits are temporary for big firms, permanent only for small companies. And the benefits Clinton gives with tax credits, he takes away with increases in corporate income and energy taxes. In that sense, the program is a wash. That’s one reason why the stock market has fluctuated, unable to pick out specific winners in the Clinton economy.

Yet there is direction and meaning to the economic program. At its core, “It subsidizes high-tech infrastructure,� says economist Murray Weidenbaum, former chairman of the president’s Council of Economic Advisers. That is, without targeting specific industries or companies, it helps finance the environment in which new technologies can develop.

The proposed “information highway� will push the frontiers of high-speed supercomputing--and a host of unforeseen developments.

Defense conversion funds won’t keep alive old weapons projects but will bring military technology to a point at which commercial firms can make use of it.

And support for advancing the art and science of electrical batteries, aiming at an electric car, will help a far larger battery business than you might imagine.

“There’s no company you can point to,� says analyst Robert Herwick of Hambrecht & Quist, a San Francisco brokerage specializing in high-tech issues, “but the program will help in general.�

The information highway project--an attempt to devise a nationwide, interactive computing and video system reaching into every home and office--will do research through university computing centers. Cray Research and other supercomputer companies could benefit directly. But mainly the knowledge gained will aid the telephone and cable companies, now planning for interactive video--and electronics firms such as Intel, which sees its long-term future in powerful microchips that will turn personal computers into multifaceted communications devices.

Could an information highway be done without federal help? Possibly, but not soon. Much of the technology is not yet at the commercialization stage, where companies large and small can afford to leap in with new products and services.

Similarly, converting defense know-how has been talked about for years, but venture capitalists and entrepreneurs have done little because the technology is too expensive and sophisticated for commercial use.

Now, with government helping the transition, perhaps commercial products can be adapted from such wonders as the all-weather optics and sensing capabilities that allow U.S. planes to fly at night over Bosnia and parachute food into a quarter-mile drop zone.

Companies in the automotive industry are already cooperating--in the Advanced Battery Consortium--in the attempt to develop a safe, environmentally sound and long-lasting power source for an electric car.

And battery research is the hot topic in computers as well, where the heaviest component by far in laptop and palmtop computing and communications devices is the clunky old battery, which fades after an hour’s work. Battery companies, from industry leaders Duracell and Eveready to start ups such as AER Energy of Smyrna, Ga. and Portable Energy Products of Scotts Valley, Calif., are experimenting with everything from lead acid to lithium.

But so far the search has been frustrating, says a major report in Technologic Computer Letter. And Japanese companies are ahead in the battery race thanks to the Tokyo government’s practice of funding basic, pre-commercial research.

So now the Clinton Administration proposes to help finance the crucial next step for the U.S. battery industry.

That’s too much government, it was argued in the ‘80s. But such arguments ignore recent history. As Peter Drucker points out in his forthcoming book, “Post-Capitalist Society,� in the last 15 to 20 years one political leader after another--Jimmy Carter no less than Ronald Reagan--has come to power vowing to cut back government. And yet government has continued to grow, here and everywhere.

The reality is that government is needed. The imperative for the new decade should be making government effective. If Clinton’s economic program proves effective, it will settle a lot of arguments.