Putting People First?

Clintonomics and Post-Prosperity Capitalism

By John Miller

"Putting People First." You remember. That was the economic manifesto the Clinton team produced for the 1992 campaign. The 25-page pamphlet indicted the supply-side economic policies of Ronald Reagan and George Bush that helped "the rich get richer," while "the forgotten middle class—the people who work hard and play by the rules—took it on the chin."

Enough to make you "still believe in hope," as Bill Clinton assured us he did during the 1992 campaign? Perhaps. But four years later, it is becoming much harder "to keep hope alive."

Despite an economy that has grown since 1992 and created the eight million new jobs promised by Clinton, working people have hardly come first in his economic polices. Clinton has overseen a regime of budget austerity and tight money that has helped to keep wages low and an unprecedented number of workers looking for full-time work.

Who has Clintonís policies put first? Thatís easy: business people and investors. In real terms, since 1992, wages and salaries have barely budged, while profits for the 500 biggest corporations have increased more than 7% each year. And stock values rose at nearly twice that rate.

Progressives are not the only ones to notice the political irony here. Wall Street Journal columnist Paul Gigot notes that Clintonomics "has done best by the same people Mr. Clinton accused Reaganomics of benefiting most: the wealthy. And it has done least for those he pledged to help most: working stiffs.

How did a presidential candidate who promised to end the rewarding of those "who speculate in paper" in favor of "people who drive pickup trucks," and sermonized that the U.S. work force was "the ultimate source" of the countryís wealth, betray his populist rhetoric? If Clinton had been inclined to make his rhetoric into reality, could we have rerouted our economic passage away from a post-prosperity capitalism in which the rich do well and everyone else falls behind?

Post-Prosperity Capitalism

In his 1996 State of the Union Message, President Clinton pronounced our economy the "healthiest it's been in three decades." And by some measures it is. The so-called misery index, the inflation rate and unemployment rate combined, is at its lowest level in a generation. The current economic expansion is now well into its sixth year with no recession in sight. For nearly two years now, the official unemployment rate has remained below the 6% rate many mainstream economists regard as full employment, and by June it had dropped to 5.3%, a six year low.

Still, many have echoed Clintonís words in 1992, "the economy goes way beyond unemployment. It is declining wages and earnings." John Sweeney, president of the AFL-CIO, put things in more colorful language: "Lately Americans have worked like mules, and been treated like dogs." On the Right, not just rogue Republican Pat Buchanan, but also the Republican standard bearer, Bob Dole, have joined in the chorus. Since confessing his surprise that jobs and trade were such a big issue during the New Hampshire primary campaign, Dole now proclaims that the economy suffers from the "Clinton Crunch" in which "workers saw their wages stagnate, [and] families had to work harder to make ends meet."

But these trends are not new. For more than two decades economic growth has provided prosperity only for the well-to-do. Corrected for inflation, median family income—the midpoint of the income distribution—is lower today than it was in 1979.

The 1990s reveal just how entrenched and bipartisan are the dynamics of post-prosperity capitalism. The Census Bureau reported in June that income inequality reached a postwar high in Clintonís term. More surprising was the Bureauís finding that the share of national income earned by the top 5% of households grew faster in the first two years of the Clinton Administration than during the Reagan years.

Daunting Challenges Persist

In its first Economic Report of the President (1994), the Clinton economic team identified six "daunting challenges" facing the U.S. economy, what they called "the legacy of the recent past": inadequate recovery from recession, inadequate productivity growth, worsening inequality, large deficits, mounting debt and inadequate public investment. Letís take up each challenge.

The economic recovery of 1992 yielded too little growth and created too few jobs. In January 1993, the unemployment rate still stood at 7.1%. "Putting People First" promised to set this right. Yet while economic expansion has continued under Clinton, the economy has hardly "performed exceptionally well," as Joseph Stiglitz, Chairman of the Council of Economic Advisors claims in this yearís Economic Report of the President. The growth rate since 1992, while higher than during the Bush years, has been only one-half to one-third as much as it was during the long expansions of the 1960s, 1970s and 1980s.

This April, the White House boasted of adding 8.5 million jobs to nonfarm payrolls from January 1993 to March 1996, more than fulfilling the Clinton campaign promise to create two million jobs a year. That figure also represents the strongest employment growth among the largest industrial nations. The U.S. economy added another 600,000 jobs in May and June of this year. This news is encouraging, if not as encouraging as Clinton suggests. Bushís jobless recovery of 1991-92 created less than 500,000 jobs a year, but the Carter-led expansion of the late 1970s created three million jobs each year.

Most of these jobs pay good wages too, the White House argued in their April report on job creation. They are not the "insecure, low-wage, no-benefit jobs" that millions of Americans settled for when Bush was president. But Stiglitzís treatment of these employment figures borders on deliberate deception. He argued that two-thirds of the new jobs are in occupations and industries that pay above-median wages. While it is true that the quality of new jobs has improved markedly since 1992, last year most (55%) of the new jobs paid less than the national average wage ($29,420), according to a recent New York Times study. In addition, while the Bureau of Labor Statistics list of the ten fastest-growing occupations for the next decade includes some high-paying jobs, such as registered nurses and systems analysts, it also includes such typically low-paid positions as cashiers, janitors and cleaners, retail sales persons, waiters and waitresses, and guards. Nor has the Clinton jobs machine brought layoffs to a halt. A New York Times poll, conducted for its series "The Downsizing of America," found that since 1980 one third of U.S. households have had a family member lose a job. In the first half of 1996 another 200,000 workers lost their jobs to downsizing, and only 15% of those laid off ever get their old job back. Two-thirds of those who find other work end up in jobs that pay less than their old ones.

Economic insecurity has kept the number of people who have voluntarily quit their jobs low, no higher than during the 1991 recession. In addition, diminished prospects slowed growth in the labor force. One million men between 25 and 55, many too discouraged to hunt for new jobs, have disappeared from the labor force in the past year or so. These "ghosts" of the U.S. economy, as the Wall Street Journal calls them, have kept labor force participation among men declining during the 1990s.

Without these effects, the slackness of todayís labor market would be unmasked. Conservative economist Alan Reynolds calculates that if the labor force had grown in the last six years as it had during the 1980s, the official unemployment rate would be at least 8%. Reynolds says of Clintonís labor market record that, "achieving low unemployment... by discouraging millions of people from working is nothing to brag about."

Poor Productivity Growth and Worsening Inequality

Productivity growth has been dismal in the United States, and not just recently. Between World War II and 1973, productivity growth—measured as output per hour of work—averaged 3% per year. Since then it has averaged just 1%.

Most observers are convinced that we will not see faster productivity growth in the near future. For instance, Federal Reserve Board economists Stephen Oliner and Daniel Sichel hold that, "although corporate downsizing makes for good anecdotes, there is little evidence to support claims that a recent spate of such activity has contributed much to productivity growth for the United States." Even the Clinton economic team projects growth of only 1.2% annually during the next seven years.

Nor have the Clinton years helped workers to get their "fair share" of the productivity dividend, whatever its size. "The once tight linkage between trends in productivity and real wages in the U.S. economy," Morgan Stanleyís Stephen Roach points out, "appears to have been broken." During Ronald Reaganís eight years in office, productivity grew a total of 11.4%, but real compensation per hour (wages plus benefits) rose only 4.0%—so only one-third of productivity gains went to workers. Since 1992 output per hour has grown 2.1%, but compensation declined 0.2%. This is good news for business, but not for workers, whose real wages have stagnated or fallen.

Clinton's inability to reforge the link between productivity and wages has devastated social equity, forcing, in Roachís words, "a dramatic shift in the distribution of income away from the agents of productivity, workers, toward the owners of capital." From 1979 to 1993, real hourly earnings of workers increased a meager 1.5%, with only the top 20% of workers enjoying an increase, while the remaining 80% suffered a 3.4% decline.

Meanwhile, capital markets boomed during the Clinton years. Stock market performance has been "exceptional" or even "superb" says the 1996 Economic Report of the President. A strange outcome during the presidency of a candidate who had promised to "shut the door on the ësomething for nothingí decade."

Deficits, Public Investment and Taxes

"Putting People First" promised to put people to work by investing more "while cutting the deficit in half." But during the 1992 campaign Clinton devoted relatively little attention to the deficit. It was the investments, not deficit reduction, that were to create millions of high-wage jobs and help America compete in the global economy.

Yet during the campaign and once elected, Clintonís economic priorities changed. In December 1992, faced with a projected budget deficit "higher than we thought it would be," Clinton put balancing the budget first and cut back on spending, especially for public investment. As the Clinton economic team remembers it now, "before it could pursue the rest of its economic agenda, the Administration had to bring the federal budget deficit under control."

Clinton did inherit a "whopping" $290 billion deficit—what it called "one of the most detrimental legacies of the previous administration." And each year the Clinton administration has reduced the deficit, nearly reaching its goal of cutting it in half, although Congressional Budget Office projections suggested that the deficit would have shrunk by a third even under Bush administration policies. Now Clinton has signed on, with prodding from Congressional Republicans, to balance the budget over the next seven years.

The 1996 Economic Report of the President warns that "Deficit reduction done the wrong way will reduce living standards and worsen inequality." While much of Clintonís anti-deficit program has done precisely this, by slowing the economy and cutting spending, Clinton has also taken one progressive step—raising taxes on the wealthy. The bulk of new revenues from the 1993 tax hike came from this step, with the top tax bracket rising from 31% to 39.6% on those earning more than $250,000. This is an impressive accomplishment. Clinton pushed through Congress a top bracket almost identical to what Jesse Jackson called for in his 1988 presidential campaign. Nonetheless, the wealthiest 5% of Americans continue to capture a larger share of our national income. And now Clinton is flirting with endorsing a modified capital gains tax cut. This is especially ironic because large capital gains tax revenues have helped to shrink the deficit.

Public investment fared nowhere near as well as taxes, even though Putting People First argued that we are "slipping behind" our global competitors because during the 1980s they invested more than 12 times what we spent on roads, bridges, sewers, and the information networks and technologies of the future. Clintonís own 1993 budget proposal, before several of the spending programs were killed off by Congress, would have raised public investment sizably (about 9% before inflation) to just under 2.4% of Gross Domestic Product (GDP). But even that fell far short of the dramatic increase needed to keep pace with our chief competitors, Germany and Japan. By 1996, Clinton had given up on revitalizing public investment, retreating to maintenance of the 1992 levels. In fact, Clintonís March 1996 budget proposal would actually spend less money relative to GDP on training, education, and industrial policy programs than did Reagan and Bush.

Why Clinton Could Have Done Better

Have our daunting economic challenges persisted because of Clintonís faults or because of the irreversible laws of motion of 1990s post-prosperity capitalism? Not an easy question to answer. Bob Dole maintains that, "it is no mystery whatís holding America back. It is the wrong-headed, outdated, liberal policies that can be summed up in one word: Clintonomics." In contrast, others in the mainstream say presidential policies are not the issue. Massachusetts Institute of Technology (MIT) economist Frank Levy, for one, says "these trends have a life of their own. The idea that a presidential administration can affect them is sheer hubris."

The economic trends of the last two decades—worsening inequality, stagnating wages and the divorcing of economic growth from workers' incomes—are in part beyond the control of presidential policies. But Clinton has reinforced instead of undoing these trends by overseeing a regime of budgetary and monetary austerity, which has slowed both economic growth and productivity gains.

Since entering office Clinton has never challenged Alan Greenspan, the inflation-phobic chair of the Federal Reserve Board (the Fed), to loosen the reigns on the money supply and so let the current economic expansion move closer to genuine full employment. And this spring, Clinton re-nominated Greenspan as head of the Fed. In the Senate, Tom Harkin, Democrat from Iowa, was one of the few to oppose Greenspanís renomination. He told his fellow Senators that, "Under the Greenspan Fed, job growth and the living standards of average Americans have been sacrificed on the altar of high interest rates and slow-growth policies." But today many economists think that we could have faster economic growth—perhaps 3% a year instead of 2%—without igniting inflation. Even Business Week, in a June editorial, urged Greenspan "to let capitalism do its thing. Rates shouldnít be raised to kill off economic growth that shows few signs of generating inflation."

By putting deficit reduction at the top of his economic agenda, President Clinton has similarly reinforced stagnation. By some estimates, Clintonís budget austerity has shaved as much as one percentage point off economic growth.

Along with stagnation, cuts in entitlement programs during the Clinton years have reduced workersí bargaining power relative to business owners. With millions of people out of work or involuntarily holding only part-time jobs, most workers can be easily replaced, and are unable to bargain from a position of strength. Cuts in the social safety net, including unemployment and welfare benefits, have further disempowered workers. The absence of entitlements that allow people to survive even while out of work dissuades them from going on strike or voluntarily leaving undesirable jobs.

Take up the Slack

An economic program that turned much of Clintonís rhetoric into reality could help to restore widespread economic prosperity. That would mean first and foremost promoting genuine full employment—taking up the considerable slack in todayís labor market. MITís left-of-center economist Lester Thurow says that "about one-third of the American workforce is potentially looking for more work than they now have." It has been nearly thirty years now since the U.S. economy last reached full employment. By the end of the 1960s, rapid economic growth, spurred on in part by Vietnam War spending, pushed the official U.S. unemployment rate below 4%. Full employment brought with it prosperity—higher real wages, better working conditions and less job discrimination. It also lifted many people out of poverty and reduced the gap between rich and poor.

In a recent paper, economists Robert Pollin and Elizabeth Zahrt argue that the Vietnam experience shows that an expansionary fiscal policy could provide widespread economic benefits in the United States today. Beyond a political commitment to government spending, federal policies must also confront economic globalization, rampant financial speculation and worsening inequality. To do that, Pollin and Zahrt call for an expansion led by public investment, along with an industrial policy that favors long term investment over short-term financial speculation and promotes more cooperative labor relations. That sort of populist economics could genuinely put people first in a prosperous U.S. economy.