A Clintonomics Sequel

Mortgaging Our Economic Future Once Again

BY JOHN MILLER | July/August 2016

This article is from Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org

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Hillary says she’ll use Bill on the economy... [S]he’d put the First Husband “in charge of revitalizing the economy,” and she’s since added that “he’s got to come out of retirement” to raise incomes and put people back to work....

•Taxes: Bill Clinton raised income taxes in 1993 to a top rate of 39.6%, but...In 1997 Mr. Clinton even...cut the top capital gains tax rate to 20% from 28%....

•Trade: The global trading system had a great decade in the ’90s, not least because of Mr. Clinton’s leadership. Most consequentially, he spent political capital to move the North American Free Trade Agreement...through Congress...

•Regulation. In 1999 he modernized financial services regulation, repealing the 1932 Glass-Steagall Act that separated commercial and investment banking...

•Labor markets. The ’90s saw the lowest U.S. unemployment rate in a generation, which drove wage growth...

—“His and Her Clintonomics,” Wall Street Journal editorial, May 17, 2016

The Wall Street Journal editors are all for a second round of Clintonomics. Their biggest worry is that Hillary Clinton has been more about Obamanomics—or, worse yet, Bernie Sanders’ equality-seeking, Wall Street-bashing economic policies—than about Bill Clinton’s pro-corporate, pro-Wall Street policies. For the Journal editors, those policies were the key to the economic successes in the 1990s.

But the Journal’s glowing review of Bill Clinton-era economic polices oversells the Clinton boom, overstates the effectiveness of Clinton’s policies, and, most importantly, ignores how those policies mortgaged our economic future. In fact, the original Clintonomics helped unleash the forces that brought about the financial meltdown and Great Recession of the last decade and the economic stagnation of this decade.

A Very Impressive Boom?

“A very impressive boom.” That’s New York Times columnist and Nobel laureate Paul Krugman’s description of the Clinton-era expansion. The Journal editors would add that the economic record of the Clinton expansion looks especially robust when compared to the anemic growth under Obama. But before we dub the Clinton-era policies as stem cells for generating economic booms, let’s take a closer look at the actual record of the 1990s expansion, and not just during the Clinton years.

The 1990s expansion began in March 1991 under the presidency of George H. W. Bush and lasted, through the Clinton presidency, until March 2001. It was the longest U.S. expansion on record, at 120 months. That is more than twice as long as the average economic expansion since 1949, and considerably longer than the current recovery, since the official end of the Great Recession in June 2009.

By other measures, however, the 1990s expansion was no record-setter. Its 3.4% growth rate, while twice that of the current expansion, was lower than that of the average expansion since 1949. Also, while the number of private-sector jobs increased more quickly than during the Obama expansion, the 1990s expansion added jobs more slowly than the post-1949 average. Real wages (corrected for inflation) did rise during the 1990s. That didn’t happen during the Reagan-era 1980s expansion. But real hourly wages increased only half as quickly during the 1990s expansion as they had during the long expansion of the 1960s.

The labor market successes of the 1990s expansion followed a shallow recession that lasted half as long, lost one-third as much output, and destroyed one-third as many jobs as the Great Recession. The expansion during the 1990s pushed the unemployment rate down to 3.9%, well below today’s 4.7%. But because it started far closer to full employment than the current expansion, it knocked just 3.9 percentage points off the unemployment rate, considerably less than the 5.4 percentage points the unemployment rate has fallen during this decade.

Finally, the 1990s expansion did lift the incomes of those in the middle. Median household income corrected for inflation rose 1% a year. That was, however, only one third as quickly as during the long expansion of the 1960s.

The gains for ordinary people during the 1990s expansion were dwarfed by those of the most well to do, and inequality worsened. Thanks to the stock-market boom, the gains of stockholders were ten times those of the median household. (In 2001 the wealthiest 10% owned 89.3% of all stock shares.) During the 1960s expansion, about 12% of income gains had gone to the richest 1%. During the 1990s, that number reached 45%, higher than it had been even during the Reagan era.

Bill Clinton’s Good Fortune

But whether or not you give the 1990s expansion a glowing review says very little about the effectiveness of Clinton’s economic policies. That’s because the successes of the Clinton-era boom had little to do with his economic policies. Rather, as Paul Krugman has put it, “Clinton had the good luck to hold office when good things were happening.”

Most importantly, Clinton won the productivity lottery. As computer technology spread throughout U.S. business, productivity surged, especially in the second half of the 1990s. In the almost two decades from 1973 to 1990, output per hour worked, the standard measure of productivity, improved 1.4% per year. But, from 1995 to 2000, the rate of productivity growth more than doubled to 2.9% a year.

Rapid productivity growth can improve living standards by allowing higher pay for workers without increasing costs, per unit of output, to employers. And nearly all of the wage gains of the 1990s expansion came during the period of rapid productivity growth in Clinton’s second term (and after an increase in the minimum wage). With productivity gains keeping labor costs in check, investment picked up. The combination of additional investment and consumer spending, which came with rising purchasing power, drove the economy toward full employment.

While Krugman does not endorse Clinton’s policies, he does extract two positive policy lessons from the Clinton era. First, progressive taxes need not be an impediment to economic growth. The successes of the 1990s expansion happened, contrary to conservative dogma, even though Clinton (and Congress) increased the top income tax bracket. Second, wage gains happen when the economy approaches full employment. The Clinton era relied on private investment and productivity gains to make that happen. But given the paucity of private investment in today’s economy, Krugman argues that what is needed is a massive injection of public investment—an infrastructure buildup as he calls it—to drive today’s economy to full employment.

Our Misfortune

More progressive taxes and public investment are, indeed, much needed. But Krugman has let Clinton’s economic policies off easy. It is no accident that the Wall Street Journal editors have gone out of their way to praise Clinton’s policies and to endorse Clintonomics: The Sequel. As Thomas Frank, the political analyst and journalist, has argued, each of Clinton’s major policy victories accomplished “longstanding Republican objectives.” Whether it was NAFTA, welfare reform, deregulation of the financial industry, or balancing the budget, Clinton initiatives empowered corporations and finance at the expense of workers, poor people, and minorities, here and abroad. The rising income inequality of the Clinton era, described earlier, is only one example. In addition, Clinton’s policies not only helped create the conditions that led to the Great Recession, but now stand in the way of measures that could turn the economy around.

Two Clinton policies are especially blameworthy: balancing the budget and deregulation of the financial sector.

When Clinton ran for President in 1992, he promised, “to put people first.” But he quickly abandoned his campaign promise in favor of balancing the budget. During his administration, federal- government spending as a percentage of GDP fell by more than during the Reagan years. By the end of the Clinton administration, the federal government was smaller, relative to the size of the economy, than at any time before the expansion of Social Security in the mid-1960s. While post-Cold War defense cutbacks contributed to the trend, domestic spending accounted for the majority of the cuts in government spending. Spending on supports for poor families, including food stamps and nutrition programs, all fell relative to GDP.

The reduced size of government stood in the way of enacting the spending policies needed to counteract the Great Recession, and continues to be an obstacle to enacting public investment spending vital to restoring robust economic growth.

Clinton’s budget policies also actively contributed to the worsening inequality, another obstacle to enlivening economic growth and to improving the lot of most people. His budget-slashing reduced the redistributive effect of government spending, as inequality rose more quickly than during the Reagan years.

From the very beginning of his administration, Clinton was an advocate of financial deregulation. In 1994, he backed and then signed legislation that removed the restrictions on interstate banking—and added to the number of “too big to fail” banks. In 1999, he approved the repeal of the Depression-era Glass-Steagall Act that separated commercial and investment banking, which both fueled the growth of giant banks and took down a firewall that might have slowed the spread of financial crisis of the next decade. Finally, in 2000, the Clinton administration engineered the passage of the Commodity Futures Modernization Act, which placed a whole area of finance outside the realm of regulation, including much of the derivative trading that played such a destructive role in the financial crisis.

Mortgaging our Future

In short, whatever Clinton policies might have done to sustain the longest economic expansion on record, they mortgaged our economic future. The Journal editors might be right (for the wrong reasons) that once was enough for Obama’s economic policies. But once was once too many for Clintonomics.

is a professor of economics at Wheaton College and a member of the Dollars & Sense collective.

Paul Krugman, “Remembrance of Booms Past,” New York Times, May 23, 2016; “Thomas Frank: Bill Clinton’s Five Major Achievements Were Longstanding GOP Objectives,” interview conducted by Mark Karlin, Truthout, May 15, 2016; Josh Bivens and John Irons, “A Feeble Recovery,” Economic Policy Institute Briefing Paper, Dec. 9, 2008 (epi.org); “Low Labor Productivity Growth The Main Culprit,” Economic Cycle Research Institute, June 8, 2016; Robert Pollin, Contours of Descent (Verso, New York: 2003); Arthur MacEwan and John Miller, Economic Collapse, Economic Change (M.E. Sharpe, Armonk, New York: 2011).

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