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Bill Clinton is baaaaaaaaack!

from Dean Baker

The New York Times reported last week that former President Bill Clinton is working on a new book on economic policy to be released in time for next year’s election. This is unfortunate, since Clinton stands alongside Alan Greenspan as one of the last people who should be giving the country and the world advice on economic policy.

Many people look back with fondness on Clinton years and there is good cause. The economy grew at an annual rate of almost 4.5 percent during his second term. The unemployment rate fell to a 4.0 percent as a year-round average in 2000. And the country saw strong real wage growth up and down the income ladder for the first time since the early 70s.

This was all good news. However, it was unsustainable and Clinton’s economic team should have known it at the time. The immediate cause of the prosperity was the demand created by a $10 trillion stock bubble. While this gave some boost to investment, its main impact was on consumption. People spent based on their newly created stock wealth, causing the savings rate to fall below 2.0 percent, which at the time was the lowest level of the post-war era.

Bubbles of course burst, and when this one did it gave the country a severe downturn in 2001. While the official recession was short and relatively mild, ending in just seven months, the economy didn’t start to generate jobs again until September of 2003.

It is not easy to recover from a recession caused by a collapsed asset bubble, as is becoming more evident every day. The country did not regain the jobs lost in the 2001 downturn until 2005, and even then it was only due to growth driven by the housing bubble.

One of the factors that made it harder to recover from the 2001 downturn was the sharp increase in the country’s trade deficit. Demand was diverted abroad from domestically produced goods and services. This was in turn a direct result of the high dollar policy that was put in place by Robert Rubin when he became Treasury Secretary.

Rubin put muscle behind his high dollar policy when he oversaw the IMF bailout of East Asia from its financial crisis in 1997. The harsh conditions led the countries of the region to sharply devalue their currency against the dollar in order to accumulate enormous reserves of foreign exchange. Other developing countries also followed this path in order to avoid ever being put in the same spot as the East Asian countries.

As a result of this policy, the U.S. trade deficit soared, eventually reaching 6 percent of GDP in 2006. This was the fundamental imbalance in the U.S. economy. By definition, a trade deficit of this size requires either large budget deficits or negative private savings. We saw the latter in a big way as housing bubble wealth led to another consumption boom that pushed the savings rate to near zero from 2004-2006.

Clinton also removed restrictions on the financial industry. This left the door open for AIG and others to run wild with credit default swaps.  It also created an environment in which every new financial innovation was seen as a step forward for society.

Clinton also deserves some grief from shoving the TRIPs provisions into the Uruguay round of the WTO. The TRIPs provisions, which are largely the invention of the U.S. pharmaceutical industry, are rules that require countries to have stronger patent and copyright protections. They are likely to lead to sharply higher drug prices in the developing world. One of the main goals of President Clinton’s foundation is to try to make essential medicines affordable for people in the developing world. The TRIPs provisions are one of the reasons that these medicines became unaffordable.

Thankfully, Clinton probably will have the sense not to lecture us on the virtues of TRIPs or his removal of restrictions on the financial industry. More likely he will be preaching the virtues of balanced budgets. This is the part of the legacy that the country must have the courage to reject.

Balanced budgets are 180 degrees the wrong answer in today’s economy. We desperately need government deficits in order to make up the lost demand from the private sector. For the near-term future, the private sector is not going to spend enough to bring the economy back to full employment.

But balanced budgets were also the wrong answer in the Clinton years. Clinton’s spending cuts and tax increases helped get the deficit down in his first term, but the main reason that the deficit continued to shrink and turn to a surplus was the growth driven by the stock bubble. The Congressional Budget Office’s projections showed that even with the Clinton administration’s tax increase and spending cuts we still would have been looking at a substantial deficit in 2000 had it not been for the stock bubble.

In short, President Clinton did not balance the budget; the stock bubble balanced the budget. There is no doubt that excessive deficits can harm the economy, but we are not looking at such a situation now or any time in the near future. Over the longer term, we are projected to run large deficits but this is entirely because our health care system is broken. If our health care system was as efficient as that of any other wealthy country, we would be looking at surpluses, not deficits.

Please President Clinton,  save some trees. Don’t give a half-backed lecture on the virtues of deficit reduction. It is not what the country needs.

See article on original website

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Categories: The Economy
  1. alice
    October 4, 2011 at 9:17 am

    I think its time Bill Clinton put his hand up (honestly) to say he was part of the past three decades of poor policy. I think its time Bill Clinton retired. I dont think he stood for much except moving democracy further away form the ordinay man and towards plutocracy thats exists now, ie policies that favour the the already wealthy at the expense of everyone else.

    A great disappointment was Bill Clinton (a huge disappointment), even if not as a great a disappointment as George Bush (with his expensive war on nothing)…they both moved in the same direction…. greater inequality and they both helped shove middle class and the poor in the U.S. down further.

    No I dont worship Clinton and he has nothing to say of any merit now. Cant he just retire into obscurity because his wife is doing a better job now.

  2. October 4, 2011 at 2:42 pm

    I think it is a good idea for Clinton to publish a book. Then he can be hung out to dry for the pleasure seeking bubble maker that he is. (I wonder if Monica is still around?)

  3. October 4, 2011 at 3:55 pm

    Here’s an idea: why don’t ever body jes’ paint yer ceilin’s white? Er, ah, maybe it’s yer rufs?

  4. Podargus
    October 4, 2011 at 6:31 pm

    Slick Willy,he of the loose fly zip,morals of a dog – he wouldn’t qualify as the worst of American presidents but that’s only because of the stiff competition.

  5. Randy Maatta
    October 5, 2011 at 6:43 am

    It is true the deregulation of the financial industry in 1999 was a disaster in the making. Of course, the GOP controlled Congress was equally culpable, although this BLOG doesn’t mention that part. As for running up more debt, this is absurd. I hope Clinton suggest innovative ways to balance the budget by radically altering budget priorities, and including innovative ways to cut spending and raise revenue.

    As for the recession in 2001 – 2002, no mention here of 9/11 and the devastating impact it had on the economy. It all wasn’t the tech bubble. Finally, GOP tax policy and deficit spending from 2001 – 2007 did not create jobs, but did create multiple bubbles in the credit, real estate, stock markets and the big onces yet to blow; soverign debt and personal debt bubbles. The harsh reality is we have a painful de-leveraging period ahead, and until that happens, it only gets worst.

  6. October 12, 2011 at 11:26 pm

    Hmmm… many good points, and I like Randy’s best, but maybe ol’ Willie has got some RWE religion now. I’m not counting on that though.

    Now, what are we going to DO about the plutonomy and its ongoing aftermath (stealth depression & mass impoverishment of us 99%ers), or are talk, writing, and blogging the only ways & means of RWE?

    What could possibly be wrong with inventing the alternative and implementing it for the next millennia or so?

    It sure looks like Chinese management of the world is the only other option, and that seems less than ideal. As I point out in Green Credit & Commonwealth (see The Greenbook), we can easily start the transitional (nonprofit) community credit system online, with every blog, social media site, game, etc. Really, why not ‘just do it’?

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