(FORTUNE Magazine) – CONSUMERS ARE UP-TIGHT and worried, their confidence battered by big layoffs. Business executives are equally glum. Says Robert C. Snyder, president of Quanex, a $650-million-a-year specialty-metals maker: ''We're in practically every industrial market there is -- homebuilding, capital equipment, transportation, energy -- and I don't see a turn upward in any of them.'' As of late November, the stock market was down 5.7% from its October 18 high. Retailers increasingly fret about a Black Christmas. Saks Fifth Avenue, the patrician New York department store, is offering shoppers a $100 gift check if they spend $1,000 on its already discounted merchandise by December 15. Hurry, hurry, hurry . . . Yet most economists -- including FORTUNE's -- continue to believe that the economy won't dip back into recession this quarter or next year. The mainstays of growth will be solid export sales, along with modest increases in capital spending and even consumer spending, which since April has risen at a better than 3% rate. The major risk to the forecasts is a further downturn in confidence, particularly business confidence. If nervous executives stop investing and reduce their already tepid rate of new job creation, then consumers will be forced to retrench as well. Fear itself, to paraphrase Franklin Delano Roosevelt, is something to fear. Speaking of Roosevelt, where is leadership these days? Sadly, the recent actions of Congress have aggravated rather than eased the country's fears. The most egregious misstep was the Senate's feverish approval of a bill to cap credit card interest rates. It would have hammered earnings of already ailing banks and cut off many consumers' credit, particularly among lower-income people. This surprise vote shocked Wall Street and helped send stock prices sinking faster than a Mafia stool pigeon in cement shoes. The legislators should stay home now, where they can't do any harm, and aren't set to return to the capital until January. But with elections looming, the odds of even more bipartisan populist mischief when they do are high. Meanwhile, George Bush's inability to grasp ''the vision thing'' has never been more discomfiting. Though many elements of his domestic economic program are sound, the President has been disengaged, reactive, and inarticulate in advancing it. Says Jerry Jasinowski, president of the National Association of Manufacturers: ''During the Gulf war, Bush came across as in charge and on top of things. But with the economy, no one feels he's in command.'' Even before the recession began, two decades of stagnant wage growth in manufacturing had shaken many blue-collar workers' faith in the future. Now they've been joined by white-collar employees and managers, who for the first time since World War II are facing large-scale layoffs. Many have seen the value of their homes -- for most, their principal financial asset -- drop for the first time. So they feel less wealthy than before, very uneasy about the country's direction, and highly skeptical about political leaders' ability to do the right thing. Doing the right thing doesn't mean proffering a new New Deal, some F.D.R.-like Hundred Days of pump-priming spending programs. Far from it. Given the federal budget deficit, projected to top $348 billion next year, such fiscal stimulus would spook the bond markets and send long-term interest rates soaring. Even New York's liberal governor and potential Democratic presidential candidate Mario Cuomo gets it: ''There are no magic bullets or cyclical quick fixes that can cure the economy.'' What America wants, believe it or not, is proof that somebody's thinking about tomorrow. Sure, that cuts against conventional wisdom, but evidence is mounting that the people are ahead of their leaders on this matter. A recent poll by the Council on Competitiveness, a Washington business lobby, asked respondents to pick America's most important goal for the next five years. By a large margin they selected ''strengthening technological and industrial leadership in the world.'' It prevailed over such hot-button issues as helping the needy and addressing the middle-class's worries about health care. Pollster Daniel Yankelovich concurs. Says he: ''A back-to-basics approach that emphasized investment, savings, building for the future, and productivity would have enormous appeal right now.'' The best thing President Bush could do would be to swallow hard, reach back for some rare Rooseveltian rhetoric, and tell the country the blunt truth. Today's pain is the price the U.S. economy must pay to correct the dangerous imbalances that built up in the 1980s: too little saving (see following story), too much investment in real estate, and an unsustainable rise in consumer, corporate, and government debt. This admission will be awkward, since Bush was Vice President when these excesses occurred. But that's what they pay speechwriters for. The good news, he may quickly point out, is that because the Federal Reserve has been stalwart in the fight against inflation, it should be able to keep monetary policy easy enough to propel the economy back onto at least a modest growth path. Short-term interest rates have dropped 3 1/2 percentage points to around 4.5% since August 1990. Yes, long-term rates have remained stubbornly high; at roughly 7.9%, the yield on a 30-year Treasury bond is about where it was in November 1989. But mortgage rates have declined too, and people have already seized the chance to refinance. This reduction in interest costs should eventually put some additional oomph behind consumer spending. And by most measures, the country is in far better shape than it was at the end of the last recession. The heart of Bush's message should be a renewed pledge to tackle the underlying structural problems that, unless addressed, will surely drop U.S. growth behind that of its European and Asian competitors in the 1990s. These remain largely what they were in the early 1980s: a stubbornly low saving rate -- made worse in the past decade by immense government deficits -- and too little investment in new plant and equipment, in new technology, and in the human capital that ultimately makes any economy's wheels go round. Here are the basic planks of the economic plan that Bush -- and any of the Democratic presidential candidates, for that matter -- would be wise to advocate: -- Boost savings and investment. If Congress trims taxes next year, the overwhelming consensus on Capitol Hill is that much of the relief should go to the middle class. What are the chances of focusing solely on pro-investment cuts? ''Zero,'' says John Albertine, a Washington business lobbyist who played a key role in the big tax battles of the 1980s. That's too bad. Selling income tax cuts as a quick stimulus for the sluggish economy is a fraud. Most proposals, such as Texas Senator Lloyd Bentsen's popular plan to give families a $300-per-child tax credit, won't take effect fully until 1993. Besides, handing consumers $300 per child (roughly the price of a Super Nintendo, plus a couple of game cartridges) would do nothing to cure the real disease plaguing the U.S. economy -- chronic underinvestment. Capital investment last year accounted for only 12.6% of real U.S. GDP, vs. 14.1% for Germany and 23.4% for Japan. Perhaps the best way to lower taxes on capital, as many economists have argued for years, would be to integrate corporate income taxes with the individual income tax. The details get complicated, but the basic idea is to stop taxing business earnings twice -- once at the corporate level and again when profits are paid out as dividends. Says Federal Reserve Board governor Wayne Angell: ''No factor in our tax laws works against us as much as that.'' Most of America's main foreign competitors already give shareholders some kind of break on dividend payments. Other effective options for cutting taxes on capital formation include allowing business to immediately write off the cost of new investment, bringing back some form of investment tax credit (ITC) or accelerated- depreciation scheme, and cutting or indexing capital gains taxes. All these changes would produce revenue losses, often quite large ones. Congress's Joint Committee on Taxation has estimated that the annual cost of an ITC is over $34 billion. But that loss should be offset at the expense of consumption -- say, by raising gas taxes or by adopting some form of value-added tax. In sorting through these alternatives and then pushing one through the political meat grinder, a would-be leader should be guided by a few broad principles. First, the net effect of any policy changes should be to lower taxes on investment and raise them on consumption. The big flaw in the 1986 act was that lower marginal rates for individuals were paid for by increasing corporate taxes -- by some $120 billion from 1987 to 1991. Second, though investment incentives are good, don't overdo them. A major flaw in the 1981 tax act was that Washington, spurred by a bidding war on Capitol Hill, ended up subsidizing the new investments companies made. Third, and most important, don't let Congress substitute a ''fly now, pay later'' approach to tax cutting for the laudable pay-as-you-go doctrine adopted under the 1990 budget deal. Says Stanford economist John Shoven: ''We're never going to get national savings up very far if we can't get government dissaving down.'' -- Lift spending on technology and infrastructure. Since 1980, the government's non-defense capital spending -- investment in roads, ports, basic research -- has fallen from 7.8% of the budget to 5.1%. Today there's a bipartisan consensus that Washington can and should do more. Both parties seem ready to make the temporary 20% tax credit for corporate R&D spending permanent. They have already backed a doubling of the budget for the National Science Foundation, which funnels research grants to government and university labs, and are underwriting modest experiments in ''precompetitive'' research by industry on new technologies, such as high-resolution video display terminals. But the mammoth $150 billion highway bill Congress has been debating for the past year is a model of what ought to be extinct. Though it supports much building that is urgently needed, it's also riddled with useless pork. ''We shouldn't be looking for infrastructure investment that merely generates jobs,'' says economist Herbert Stein of the American Enterprise Institute. ''We should be trying to identify the public investments that are most critical for the long term.'' One candidate for seed money: a fiber-optic network that could become the information superhighway of tomorrow. -- Stitch up the social fabric. Where to start? Crime, drugs, homelessness, heightened racial tension? All cry out for attention. For middle-class voters, the problems that seem most threatening right now -- and are also most critical to future productivity growth -- are the sorry state of America's schools and the expensive, but inadequate, U.S. health-care system. On education, Bush has made a creditable start. He has assembled a first- rate team, pounded his bully pulpit, and identified some sensible goals. But on health care, he has been missing in action -- he had hoped to duck the subject entirely until after the election. That's no longer possible. Voters deserve a chance to judge who has the most persuasive plan for extending medical coverage to every American -- without bankrupting the nation. -- Reshape regulatory policy. Under the Bush Administration, the economy has been saddled with two hugely expensive new regulatory burdens -- the Clean Air Act and the Americans With Disabilities Act. The ends may be socially desirable, but no offsetting drive has been launched to expand productivity by altering or abolishing a host of unwarranted regulations. Says Brown University economist William Poole: ''The individual costs of any of these policies may be small, but collectively they really hurt us.'' First up on the operating table next year should be the country's outmoded system of bank regulation -- the regulatory equivalent of a ruptured appendix. At a minimum, banks must be able to compete across state lines. Banking analysts blame both Bush and Congress for the failure to approve such legislation in 1991. Complains James McDermott, president of Keefe Bruyette & Woods in New York City: ''The White House never gave this the muscle it needed.'' What about a renewed push against the credit crunch? Anecdotal evidence of this hard-to-quantify evil abounds. Says the CEO of a major regional bank: ''Regulatory pressure is forcing us to turn away what used to be creditworthy customers. In fact, we've now structured the compensation of our lending officers to reward them for not lending.'' No one wants a return to the go-go lending of a few years back, but this sort of reaction clearly seems excessive. Bush's recent move to reduce the number of real estate loans that bank examiners deem nonperforming should help. -- Dare to be creative. Here's the problem. Taxes as a share of GNP are at a record high. Meanwhile, Washington continues to push more spending responsibility down to the states. They can't run deficits, and politicians face unemployment if they raise taxes. What do you recommend? Robert D. Hormats, vice chairman of Goldman Sachs International, offers this intriguing proposal: Give a five- to ten-year break on federal taxes to any state and municipal enterprises that are privatized -- airports, toll roads, water utilities. ''Right now it's hard to get people to buy these entities, because their profits would be low initially,'' he says. This idea costs Washington nothing, since as state bureaucracies, these organizations already operate tax-free. Hormats figures his plan should lower expenses, generate new state tax revenues, and deliver services more efficiently. Innovative ideas will help, but the main challenge facing Washington now is to make tough choices. If it avoids reflating the economy and does what's required to increase investment, savings, and productivity, America's prospects will grow increasingly bright. Selling voters on the promise of future gain from current pain was never easy. But that's why they call it leadership.

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