(FORTUNE Magazine) – A LIBERAL WHO can count.'' That's how Michael Dukakis, governor of Massachusetts and Democratic presidential front-runner, describes himself. Not a bad call. The phrase highlights the contrasting forces that shaped his administration in Massachusetts. It suggests what he would be like as President. In this corner is Dukakis the liberal activist. As chief executive of the only state that voted for left-wing Democrat George McGovern in 1972, Dukakis has moved to tighten the state's anti-takeover law, raise the minimum wage, impose stringent waste-management controls, and mandate universal health insurance. Since 1983, he has added 10,000 people to the state payroll (raising the total to 90,570) and increased spending and debt to all-time highs. Says Christopher Anderson, general counsel of the Massachusetts High Technology Council, a lobbying group: ''In all he's done, Dukakis demonstrates a fundamental belief that an expansive government is better poised to address society's problems.'' And in this corner is Dukakis the bean-counting, consensus-building technocrat. During his first term, beginning in 1975, he had to wipe clean an unexpected $530 million deficit, which he inherited. This he did with the biggest personal income tax increase in Massachusetts history -- in spite of an ''ironclad'' campaign promise not to raise taxes. He was soundly defeated for reelection in 1978 and has avoided detailed campaign proposals ever since. In his second term -- his governorship resumed in 1983 -- Dukakis pioneered market-based programs that used small amounts of public money to attract large amounts of private investment. A prosperous economy and tougher tax enforcement boosted revenues, while Dukakis cut taxes. Social services expanded and his fellow governors designated Dukakis the most effective of their number in 1986. Businessmen can certainly find a lot to fear in Dukakis -- his open love affair with big government and his willingness to make industry bear much of the burden of his social programs. But they can see something to admire too: a strong manager, who can meet a budget.

As he stumps across the country, Dukakis the liberal talks about increasing federal spending for housing, health care, and regional development. He speaks of imposing new costs on business by raising the minimum wage, requiring notification of plant closings, tightening environmental enforcement, and legislating universal health insurance. At the same time, the Dukakis who can count emphasizes the importance of reducing the federal deficit. His solution: Cut the growth in defense spending and farm subsidies, tighten tax enforcement, and, if necessary, raise taxes. He has no plans to wait for budgetary balance before starting to spend. < Says the candidate: ''We must move simultaneously on both fronts. Getting the economy moving again is a very important part of deficit reduction.'' He believes he can achieve many of his economic development goals without new expenditures by simply moving around the money in the federal budget. That, however, would require action by Congress, which seems by nature unable to give up costly programs. The potential danger is more spending, financed by higher taxes. Dukakis would bring to Washington the consensus-building operating style that evolved from his humiliating defeat in 1978. ''That loss was very important and powerful for me,'' he says. ''It created a better person, a better governor, a better listener, a better delegator, a better consensus- builder.'' On controversial issues, Dukakis calls together opposing factions, those inside and outside government, and helps them hammer out a solution. Then he champions it. In Massachusetts, this approach has broken legislative logjams on plant closings and education reform. In Washington, his supporters believe such an approach could help end the donnybrook over the deficit. Dukakis sees his style this way: ''I wouldn't just walk into the White House and say: 'Make my day.' That's why the Reagan Administration's legislative record has been so weak. You've got to be a partner with Congress.'' NO MATTER whether he ends up on Pennsylvania Avenue or back on Beacon Hill (where his third term as governor runs through 1990), Dukakis will have a deficit to deal with. For the first time, he is facing a Massachusetts deficit of his own making. After years of double-digit revenue growth, he was stung to learn that fiscal 1988 receipts might come in as low as 5.7%; he had projected a 6.6% increase over the prior year. Says John Flood, chairman of the taxation committee in the Massachusetts House: ''Anybody with common sense could have predicted that we couldn't have sustained those revenue increases. But the governor spent right up to the dollar. Now we're facing a fiscal crisis.'' Since Massachusetts is a balanced-budget state, Dukakis wants to cut spending by as much as $233 million in 1988, and raise revenues more than $300 million by mid-1989. He is already planning where to trim and how to tax. Says K. Heinz Muehlmann, chief economist of the Associated Industries of Massachusetts, the state's major manufacturers' lobby: ''Companies are very worried that the state will abandon its pro-growth policies.'' Is the Massachusetts miracle really more of a mirage? In some ways, yes. The reason for the state's remarkable drop in unemployment -- from 11.2% in 1975 to under 3% in 1988 -- has more to do with low population growth than high levels of job creation. The high-tech boom in the land of Harvard, MIT, and Digital Equipment Corp. probably would have happened no matter who was governor. Besides, the boom is not reverberating through all of Massachusetts manufacturing. Although service jobs continue to grow, the state has lost about 100,000 factory jobs since 1983. From 1980 to 1987, Massachusetts employment grew 17%, vs. 15% nationwide. What accounted for the dramatic drop in the state's unemployment was the minuscule population growth of 1.7% from 1980 to 1986, vs. 6.4% for the country. It's not that Bay Staters were pulling out. Rather, few people were moving in; they couldn't afford to. Massachusetts housing and auto insurance costs, for example, have long been among the highest in the U.S. ''There was no miracle,'' says Boston economic consultant David Birch, an authority on job creation. ''Massachusetts simply rose with the U.S. tide. Its unemployment rate fell because of its slow population growth. For the same reason, Grand Forks, North Dakota's unemployment rate is only 4.7%. I like to talk about the Grand Forks miracle.'' The fundamental shift from old-line factory work, primarily in the textile, apparel, and shoe industries, to high-tech manufacturing and service jobs was under way before Dukakis took office. The trigger was the demand for minicomputers, where such Massachusetts companies as DEC, Data General, and Wang are national leaders. Also boosting business was Ronald Reagan's defense buildup, which poured $48 billion in prime contracts into Massachusetts from 1981 through 1987. Ironically, Dukakis would cut defense spending. In a recent study published by MIT Press, Nancy S. Dorfman, an economist at MIT, concludes that the high-tech boom was ''virtually spontaneous, unabetted by efforts on the part of local-interest groups or government.'' The governor's energy policies may be partly to blame for the state's loss of manufacturing jobs. He opposes new nuclear power plants and supports strict enforcement of environmental regulations that limit the use of coal and ban offshore drilling. Last year Massachusetts had to ask companies twice to cut back on energy usage to avoid brownouts. Says Thomas Phillips, chief executive of Raytheon Co., the state's second-largest employer: ''Each CEO is worried about whether or not to expand in Massachusetts. We're in a very vulnerable position.'' STILL, Dukakis can take credit for policies that sustained and spread the heady economic growth. First, he eliminated the deficit. Then the self- professed Merlin of Massachusetts launched many remarkably successful public- private partnerships. With government providing the impetus and business putting up the seed money, these groups have funded startup companies, reformed welfare, retrained laid-off workers, and brought prosperity to depressed areas. ''Dukakis understands the importance of making his programs market-driven,'' says R. Scott Fosler, vice president of the Committee for Economic Development, a business-backed research group. ''He also knows that the way to do that is to make business a partner in the funding.'' A dozen or so quasi-public financing institutions co-invest with private banks and venture capitalists in companies, both at birth and at death's door, and in such community projects as low-income housing and commercial development. For example, the Massachusetts Capital Resources Corp. backs high-risk businesses. Insurance companies in the state, prodded by modest tax breaks, put up the seed money for it. The Massachusetts Technology Development Corp. (MTDC) is a state-funded venture capital outfit that invests mainly in high-tech startups. Most economists believe the impact of these Dukakis-created institutions is slight. But to the companies that benefit from them, the effect is enormous. Take Interleaf Inc., a computer-aided publishing firm. Co-founders David Boucher and Harry George quickly used up $120,000 in personal savings trying to get the company off the ground in 1981, and were then unable to raise outside money. But when the MTDC invested $200,000, other venture capitalists followed. Says Boucher: ''We couldn't have continued without it.'' In June 1986, Interleaf went public; its shares are now worth about $200 million. Boucher estimates that the MTDC made back over 50 times its initial investment. The money is reinvested in other projects. Probably the most heralded Dukakis initiative is ET Choices, a program that pays for welfare recipients' transportation and child-care costs while it trains them for such jobs as computer assemblers and operating room technicians. Since 1984, ET has put 45,000 welfare recipients to work, 73% of whom are still employed full time, another 9% part time. The program isn't cheap: For fiscal 1989, the governor has requested $102 million. But moving people from the welfare rolls to the tax rolls saves money. From October 1983 to June 1988 the welfare savings alone should be $146 million, according to the Massachusetts Taxpayers Foundation. Says President Richard Manley: ''We thought this program was horsefeathers, but found it to be amazingly successful.'' Massachusetts business leaders also praise a more recent Dukakis innovation, the Industrial Services Program, which helps retrain workers laid off by plant closings. The state acts as a consultant and co-financier for companies that want to retrain workers at state educational institutions. The program has been used by small companies as well as such giants as General Dynamics, General Electric, and United Technologies. Last year, for a modest investment of $3.6 million, the state helped retrain 11,000 laid-off workers, of whom 77% got jobs within a year at 92% of their previous wages. THE HALLMARK of Dukakis's economic program is his regional development strategy. Since he first took office, Dukakis has been plowing billions of dollars in aid and commensurate quantities of gubernatorial attention into battered urban areas. In Lowell, a once blighted mill town, the state's low- cost loans and investment in parks, roads, garages, and schools helped a local development board attract Wang Laboratories. In Taunton, a town with fortunes linked to now-tarnished silver manufacturing, the state provided land for an industrial park and built a highway spur from the Boston beltway. But it was Dukakis's personal efforts to attract business that led to Taunton's resurgence. He twisted arms, provided low-cost loans, and even hosted a businessmen's bus tour of the area. Says Taunton Mayor Richard Johnson, a Democrat: ''Dukakis played a critical role in our revival.'' Activism is expensive. From 1983 through 1988, state spending will have risen an estimated 66%, even after Dukakis's proposed cutbacks. If the Duke's $12.7 billion 1989 budget is approved, the increase will be 82%. In mid-April, the governor signed the first state universal health insurance bill, which requires most employers to provide health insurance for their workers, or pay a surcharge that would help the state to insure almost everyone else. The Massachusetts House Ways and Means Committee estimates that the program will cost the state as much as $1.3 billion through 1992. Business groups say the private sector will pay another $1 billion. The ultimate cost is apt to be even higher. Says Barbara Anderson, executive director of Citizens for Limited Taxation, a conservative lobby: ''Every time another special interest group hits the Statehouse the cost of this program grows.'' Last year, lobbying efforts added fertility testing to the list of procedures that will now be covered by the plan. Until this year, the Massachusetts economy enabled Dukakis to increase spending and balance the budget without raising taxes -- a situation impossible to reproduce in Washington. The governor is not a born tax cutter. He supported the state's biggest recent tax cut, a repeal of the 7.5% personal income tax surcharge he imposed in 1975, only when its recall by popular referendum seemed certain. He also tried unsuccessfully to expand the state's corporate unitary tax and opposed a five-year extension of a tax credit for investment in plant and equipment. As revenue growth slows, many Massachusetts business leaders worry that the state government will look to them to foot even more of the bill. Surely imposing new costs on business and taxpayers is no recipe for growth in Massachusetts, or the U.S. Nor would the governor's more admirable economic strategies be easily replicated nationwide. The success of his financing institutions has depended heavily on a unique blend of innovative entrepreneurs, exceptional educational institutions, and healthy, aggressive banks. His job-training programs wouldn't look so good were it not for the state's severe labor shortage. Attracting businesses to Texas's deeply depressed Rio Grande valley would not be as easy as luring them down the road from Boston to Lowell. What may be transferable from Massachusetts to Washington is Dukakis's consensus-building leadership. Given the politically painful budget and trade decisions facing the next President, a partnership approach to government may make the difference between creative solutions and continued stalemate. The Democrats are betting on it.