Where good economics makes for ugly politics

THIS may not be the make or break week of Bill Clinton's presidency, but it will be very close to it. The full Senate is scheduled to begin debate on his beleaguered programme of deficit reduction, and the end result is by no means clear.

Having forced the President to back away from the deficit reduction programme that barely squeaked through the House of Representatives, the Democrats in the Senate continue to war among themselves on a replacement package.

Bad feelings abound - in the House, where members feel double- crossed after voting for unpopular measures that Mr Clinton later rejected; in the Senate, where Democrats push pet projects that Republicans uniformly oppose; in the executive branch itself, where Mr Clinton's inept handling of relations with Congress is seen as a big threat to future votes.

Mr Clinton has lost control. If he does not regain it with a successful outcome on the economic centrepiece of his presidency, he may become the longest-serving 'lame duck' in US history.

In only six months, America has moved from deficit-reduction euphoria to disappointment and gridlock. The President's willingness to abandon his dollars 70bn energy tax has triggered a feeding frenzy of special interests in Congress. Senators from oil states, having won that battle, are now pushing programmes that would place the burden on coal-producing states and the transport industry. Other senators are proposing totally reconfigured deficit programmes that bear little resemblance to the President's original. And a modest increase in federal taxes on petrol is still alive - albeit short of the necessary revenue.

The object of this tax-and-cut exercise is to pass a bill that will reduce the US deficit by nearly dollars 500bn over five years. Mr Clinton has washed his hands of the details, saying he does not care how the House and Senate arrive at this goal, as long as they get there. This, too, is doubtful.

Over six months, we have watched an exercise in largely good economics but ugly politics. Mr Clinton seized the initiative in his inaugural address, promising strong leadership in the fight to reduce the deficit. The public was firmly behind him, which gave the Congress, at last, a shield to hide behind in voting for unpopular measures. In addition, Mr Clinton had the courage to broaden the debate over reducing the deficit, placing even political untouchables on the cutting table, such as Social Security benefits, Medicare and taxes.

According to Robert Reischauer, head of the Congressional Budget Office (CBO), Mr Clinton has also focused where few presidents had before him - on the composition of government spending as it related to long-term growth and living standards. In this vein, he proposed to tackle the reform of health care. And finally, he proposed a substantial programme of deficit reduction that added up to cuts of more than dollars 435bn over five years, according to the CBO. All very positive.

What went wrong? One hesitates to compare the US with Venezuela or Chile, but there is no question there are analogies to be drawn as all three strive for serious economic reform. One big difference is that the US refuses to acknowledge it is trying to embark on a programme of dramatic reform that will have wide repercussions throughout the system: on taxes, on the delivery of health care, on savings rates, on defence spending and more. Thus, it has not elevated the importance of the programme as essential to the national interest.

What we have learned from other successful reforming economies (and from some of those that have failed) is that there are golden rules that apply to both large and small economies. One of the most overlooked is that the politics of economic reform cannot be neglected. This was the key in Chile, which was successful in its reforms, and in Venezuela, which was not.

There are other basic rules:

A new administration must agree itself on a programme of sound economics and stick to it, making only minor compromises.

The programme must be equitable so that it can be sold as one of shared sacrifice that does not benefit special interests.

To accomplish such big reform, a leader must constantly communicate with the people so that their support becomes a critical weapon in overcoming opposition from special interests. As Peggy Noonan said in her explanation of George Bush's election defeat: after lying, the worst mistake a government can make is not explaining its action.

Finally, the quality of public services must be kept as high as possible, which means competent government, and no corruption.

Now that Bill Clinton is on the defensive, it is easy to tick off the points on which he has fallen short in selling his deficit reduction package. The failure of communication that brought down President Carlos Andres Perez of Venezuela is one glaring error. Others are an over- willingness to compromise, and the widespread perception that his programme is not equitable - relying too much on tax increases, not enough on spending cuts, and not making the right spending cuts.

All is not lost, however. Mr Clinton still has a chance to influence the Senate's version of the bill and to shape the final outcome when the Senate reconciles its version with that of the House. Let us hope he makes use of the golden rules.