MEDICARE, TAXES, AND BOB DOLE: A TALK WITH THE PRESIDENT

Bob Dole may call himself "the most optimistic man in America," but Bill Clinton could be a close second. On Aug. 21, the President talked for about 20 minutes with Business Week's Washington Bureau Chief Lee Walczak, Senior News Editor Owen Ullmann, and White House Correspondent Susan B. Garland about Clintonomics, the Sequel.

What follows are highlights from that interview. This is an online-only extended version of the Q&A; appearing in the Sept. 2 issue of Business Week.

Q. If reelected, you might still have to contend with a Republican Congress. What might a realistic second-term agenda look like?

A. I would have the same agenda regardless. We have proved here the last few days that we can get things done if we work together. I just signed the Kassebaum-Kennedy health-care reform bill today, which will help up to 25 million Americans, including a huge number of small businesses, keep health insurance. Yesterday [Aug. 20], I signed the minimum wage bill, which also contained an increase in expensing for small businesses and a number of pension reforms I've been pushing for some time to make it easier to get and keep pensions for people who work for small business. And just a couple days ago, I signed the Safe Drinking Water Act and the Pesticides Protection Act. So we've proved that we can work together to do good things regardless of what happens in the Congress.

I believe if the Democrats won the Congress, we'd have a better chance to get the right kind of balanced budget and to pass better environmental and education laws. What I can achieve may or may not be affected by the congressional elections. But my goals will be the same. I'll just have to work harder with a Republican Congress.

Q. Balancing the budget will require entitlement reform. But after bashing Republicans all year for being Medicare slashers and reassuring seniors that you would protect their benefits, haven't you complicated the task of fixing the program next year?

A. I don't think so. For one thing, my budget has bigger savings in Medicare and Medicaid than any budget adopted before. It would give us a decade of stability for the Medicare Trust Fund. Then I think we have to look at what other options would be available to us. We got medical inflation down to 3.9% last year. It's running below 2% in the first six months of this year. If we have incentives from both managed care and from Medicare patients, and we give people more options, I'm not at all sure we won't be able to slow the growth of Medicare through market mechanisms in the same way you're seeing in the private sector. If not, we'll have to deal with it in the way that we normally deal with those things: with a bipartisan commission or agreement, which I think is going to be necessary, anyway, to deal with the Social Security issues out there.

So I'm not at all pessimistic about this. I think it's very easy to overestimate what a big problem this is going to be to solve. It's a huge problem if you take all the most pessimistic economic projections and you realize that the demographics of the Baby Boom changes everything for 18 or 20 years. But when you look at American history of being practical and doing what's necessary to reform Social Security and reform Medicare, we'll do whatever has to be done, and I'm not worried about it a bit.

The main thing we've got to do is to stay on this tack of balancing the budget to keep interest rates down and to get growth up. I think the worst thing we can do is to repeat the mistakes of the past and have a huge tax cut that will blow a hole in the deficit and require even deeper cuts in education, the environment, and technology and research, and things that we depend upon in terms of our future growth. I think that would be a terrible mistake.

Q. Bob Dole says the 2.3% economic growth rate is unacceptable. He'd like to shoot for 3.5% with stimulative tax cuts and regulatory reform. What's wrong with that?

A. There's nothing wrong with [the goal]. What's wrong is his approach, which is going back to what we tried before, won't work. It didn't work then and it won't work now.... The right thing to do is to invest more in education, and technology, and research. Dole would lessen those things. Every other country in the world with any real vision in the future would invest more in education, technology, and research. He wants America to invest less. That's a prescription for lower growth, not faster growth.

I can't help pointing out that when Senator Dole was still at the Senate and I proposed to nominate Alan Greenspan and Felix Rohatyn to the Federal Reserve Board, the Republicans killed Mr. Rohatyn's appointment because they said he would just be terrible because he thought we could have more growth, and they said he was going to bring back inflation. We had a better record for controlling inflation than they did.

Q. During the last election you talked about the "middle-class squeeze." Your opponent says that under Bill Clinton wages have stagnated, income inequality has grown, the total tax burden has gone up, and the middle class has fallen further behind. How do you argue with that?

A. Let's look at the facts. Average wages are finally beginning to rise. New jobs created since I've been President have been disproportionately high-wage. We have worked very hard to raise the minimum wage, to increase the expensing provisions for small business, to make retirement more accessible for people who work for small businesses, and to pass the Kennedy-Kassebaum health-care bill -- all of which help to deal with the problems of middle-class squeeze. We also worked to lower the costs of financing higher education. And if my middle-class tax plan passes, we would double the income limits on IRA investments and increase the withdrawal options. We'll give tax cuts for children 13 and under, and we'll have dramatic increase in tax relief for education. Yes, there is still some middle-class squeeze -- but it's better than it was under the Bush Administration.

And in terms of their claim that people are paying more in federal taxes -- that's simply not true. That's factually inaccurate. Middle-class squeeze is a problem, but the answer is to give the middle class a growing economy with good jobs, lower interest rates, and low inflation, and to invest in education and to help them to get health care and retirement [benefits].

Q: Are you thinking of perhaps expanding your $100 billion tax plan?

A: I may do some things with it between now and the convention. But anything I do will be targeted and will be paid for. Beyond that, let me add that I've never been against a capital-gains tax cut. I've always been against a retroactive one, and felt we ought to have a reasonable holding period so it's a real investment incentive -- all in the context of budget negotiations.

Q: We realize there's lots of campaigning still ahead, but if you should be reelected, what would the key elements of your agenda be?

A: It would be a historic achievement to balance the budget in a way that kept interest rates down, continued strong job growth, but preserved our obligations to our children, our parents, our environment, our future. And that's not done yet.

Second, I want to make this economy work for ordinary Americans. I will put enormous emphasis on education, first of all, [by] making college affordable for everybody through the $10,000 tax deduction for college tuition and the [expanded] IRA and making universal the goal of two years of education after high school by giving people up to a $1,500 tax credit. We want to hook up every classroom and library to the Internet by the year 2000, and I want to continue the work I have begun to raise educational standards higher and higher.

A lot of working people have to continue to seek education throughout their lifetimes, and I have proposed a G.I. Bill for American workers which would collapse 70 different federal training programs that don't fit with today's new economy, put them in a big pot of money, and give people who are unemployed or underployed a skills grant worth up to $2,500 a year which they can take to the local community college or [use to] advance their job skills.

We also have to work on another thing -- we've gone a long way in the last couple days by signing the Kennedy-Kassebaum and the minimum-wage act -- and that is, we have to give families the tools they need to deal with the dynamism of this new economy. More and more people work for small businesses; they have to be able to get and keep a pension, have access to health care.

One of the things that's in my balanced-budget bill that we still haven't done is to provide some help to people who are unemployed for extended periods so they can keep their health insurance between jobs and keep their children insured.

Finally, I think the biggest untapped market for American enterprise is the market of unemployed and grossly underemployed Americans who are concentrated in our inner cities and rural areas. I'll be proposing further actions to make those places attractive for investment, to build on what we've done with Empowerment Zones, to move people from welfare to work instead of just talking about it. That's a whole new opportunity for growth in America. Those are the things I'll be focusing on in my second term.