Farewell to Bill
from Dean Baker
Bill Clinton is clearly the most talented politician of our era. It is difficult to imagine Clinton losing an election to any of the people who have run for office in the last two decades. But his skills as a politician should not prevent us from understanding the track record of his economic policies. In fact, until we get a clear understanding of these policies, it unlikely that we will be able to restore the economy to a path of sound economic growth.
The mythology of Clintonomics is that Clinton took the hard steps to bring the deficit down. He cut spending and raised taxes. This supposedly shifted the budget from large deficits to large surpluses and led to a booming economy. In the late 90s we had the lowest unemployment in three decades, and we saw real wage growth up and down the income ladder for the first time since the early 70s. There was in fact much here to celebrate.
However the reality is quite different from the mythology. The reduction in the deficit was supposed to lead to an increase in investment and a fall in the trade deficit. These are the two components of GDP that increase our wealth for the long-term, the former by increasing out productive capacity and the latter by giving us ownership of more foreign assets.
It turns out that the investment components of GDP actually did not increase in the Clinton boom. After we adjust for a technical issue associated with a surge in car leasing in the 90s (leased cars count as investment in the national accounts, purchased cars are treated as consumption), investment as a share of GDP increased by just 1.2 percentage points from their late 80s level.
However this was more than offset by a 2.2 percentage point increase in the size of the trade deficit. As a result, at the height of the Clinton boom in 2000 these wealth increasing components of GDP were 1.0 percentage point smaller as a share of GDP than in the high deficit 1980s.
Instead, the component driving the economy in the late 1990s was consumption. The stock bubble led to a surge in consumption, which rose by 3.0 percentage points as a share of GDP as savings hit what was at the time a record low.
The problem with this stock bubble boom was that it was destined to go bust. There are a limited number of fools with money. At some point there was no one left to pay billions of dollars for shares of Internet start-ups that didn’t even know how they could make a profit.
This reversed the irrational exuberance that had sent the market soaring. The market tanked and the economy and the budget surpluses went with it. The recession of 2001 was officially short and mild, ending just seven months after it started. However the picture was much worse for most people in the country. The economy did not start to create jobs again until September of 2003, almost two years after the official end of the recession.
The 2001 recession was hard to recover from because it was the result of the collapse of an asset bubble, just like the current recession. It is easier to recover from a normal recession, because a typical recession is brought on by the Federal Reserve Board raising interest rates to slow the economy.
Higher interest rates lead people to delay buying homes and cars. This means that when the Fed wants to get the economy going again it can just lower interest rates and spark a surge in home and car buying. That sort of boost isn’t possible when the downturn is caused by the collapse of an asset bubble.
When the economy did finally start creating jobs again after the 2001 recession, it was on the back of the housing bubble, which drove growth in the last decade. In effect, we used the growth of one bubble to overcome the wreckage created by the collapse of another bubble, just as an alcoholic seeks to cure one hangover by starting on the next.
There is another important part of the Clinton legacy that is impeding growth. When Robert Rubin became Treasury Secretary in 1995 he pushed a high dollar policy. He put muscle behind this policy with his control of the IMF in setting the ground rules for the bailout from the East Asian financial crisis.
The harsh terms of the bailout led countries throughout the developing world to demand massive amounts of dollars. Their reserves of dollars were an insurance policy to keep them ever being in the same position as the East Asian countries. This increased demand for dollars pushed up the value of the dollar and lead to the massive trade deficits that we have seen in the last dozen years.
We will not be able to get to a sustainable growth path until we reverse the high dollar policy. The dollar has to be pushed down to a level where U.S. goods are again competitive in international markets. This is a central part of the adjustment from the period of bubble driven growth.
In short, the Clinton-era policies sent the U.S. economy on a seriously wrong path. They created an absurd obsession with budget deficits, a pattern of bubble-driven growth, an incredibly bloated financial sector and an unsustainable trade deficit.
The next time he has occasion to address the country it would be great if President Clinton could explain these facts to the American people. Now that would be a speech worth watching.
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Real-World Economics Review Blog 
Dean:
Is it not interesting that the Great Depression was preceded by a stock market bubble and a real estate bubble? Hstorical coincidence?? I think not.
Unfortunately I do not think your attack on the high dollar policy will help very much — because the huge trade surplus nations such as china have low labor costs relatively (not only because of a mismatch of exchange rates) but also because China produces industrial products using the same technology as American entrepreneurs would use, but China has production in sweat shops, using child labor that works with their adults 60 or more hours a week with no overtime increase in wages, no costly occupational safety conditions, wages far below the minimum wage, no employer health benefits or retirement programs such as social security, etc.
In other words, the labor market in China treats wrkers in an uncivilized manner — at least according to what we in the USA believe are civilized tratment of workers.
What is needed is a 21 century version of the “:Keynes Plan” presented at Bretton Woods.
The only problem with Keynes plan at Bretton Woods, is exactly the same problem we have now. Keynes plan (common sense) lost and the Banks plan (greed) won. We have failed manifestly over 60 long years to keep the financial sector within healthy limits of rapaciousness.
Compelling illustrations are provided in the first two charts here:
http://www.showrealhist.com/RD_RJShomes_PSav.html
Fair enough. But price movements alone are not enough to lower deficits. Just as long-term unemployment leads to structural unemployment, so prolonged off-shoring removes the ability to make goods that can be sold. Like the UK before it, the US has ceded industrial capability to China, Germany and Japan, and has very few sectors left where lower prices would actually lead to higher production. It can(weather permitting) produce and sell more soybeans and corn, it can sell more lumber, maybe a few more aircraft, and some heavy machinery. But for a lot of stuff, the ability to supply has just gone.
Peter – the US petitioned and championed globalisation to itself and the rest of the world ad nauseum.
It permitted its own producers to go where they pleased (which was the lowest wage lowest tax countries to produce in) on the premise of “wealth creation” for those countries by virture of foreign investment.
Too often those countries where US entrepreneurs initially went found themselves victims of firms who wanted even lower wages and even more generous tax free havens, invested nothing except the paltry wages they poid into the local communities, until those communities were used and abandoned for even lower wage countries.
The wealth was not generated but wages were pushed down (globally). Now the US suffers from these abysmal policies, but so do many other countries and it is time to question them. A few got almightily rich but many more were and are are being exploited.
Alice – you just explained everything that is wrong with US economy in few lines. So simple and so true .
It makes no economic sense for producers to remain in the west when they can simply move to the where labour gets cheaper. This is the only problem – no level of Keynesianism will reverse this. One thing that can be done, however, is to compensate with taxes . . I doubt this will help.
We are moving toward a Factor price equalization and those at the top will be hit.
Perhaps the US needs to get stuck intoi growing more soybeans, lumber and putting together some aircraft to get out f its own mess or maybe military production – the last product of a sick nation?
The fall of Rome lasted a century. Is this what we are seeing in the US? Decadence, monetary troubles, and military problems – sounds familiar. Biggest problem with Rome? Emporers moved the capital away from the city of Rome.
Sounds much like America, where emporers have moved the capital out of America.
I salute Dean Baker’s courage in pointing this out, especially at this time in campaign season. But he, along James Galbraith, having been saying isuch for years now, and the lessons have not fully sunk in. (Galbraith in “The Predator State,” especially that long term interest rates are influenced by much more than fed policy and budget balancing attempts.).
I see Clinton as a ratifier of the economic trends of the last 30 years, of neoliberalism, that is, and as having read the graveside rites for the burial of the New Deal, the two going hand-in-hand. Chief among these trends have been de-regulation of the financial sector especially (those still in love with Bill’s economic’s should remember the “execution” of Brooksley Born by Rubin, Greenspan (friend of Bill’s) and Summers), the celebration of “free trade” and globalization (who did more to welcome Red China into the inner economic circle, rolling out a “red carpet” in trade matters) and last, but not least, the implicit and explicit celebration of Ivy League “best and brightest” elitism, which was evident throughout government and the private sector, but especially at Wall Street and its hiring practices. (On this last note see Karen Ho’s anthropological work on “The Street’ – “Liquidated.” A paraphrase of the worship accorded them: ” They are the brightest people in the world; why wouldn’t you listen to the brightest people in the world?”
Well, nearly everyone, including Bill Clinton listened to them, and the world is still tottering on the edge of the consequences of their disastrous policies and calls, and how much they obscured about deeper economic trends that others read very differently: John Gray warning in “False Dawn” that there would be economic calamity from the derivatives trends.
Readers who want to go over Clinton’s portrayal of the economic world and the deeper realities and troubles of today ought to read Nouriel Roubini’s, Daniel Alpert’s and Robert Hockett’s “The Way Forward,” published by the New America Foundation in the fall of 2011 and see how its 35 pages of analysis and recommendations stand in relation to Clinton’s political economy.
I see Clinton’s golden late 1990’s as the height of illusion for “The Age of Market Utopianism,” or, if you would prefer, “The Age of Market Fundamentalism,” terms which Dean Baker doesn’t like because he hopes to use the pain of purer forms of market interventions to “discipline” the rent seeking professions of the upper middle class, as in the world of medicine, law and accounting, sharing the terrors of foreign competition so far born mainly by the working class. I hope to have more to say about that when I review Dean’s new book, which I enjoyed more than I thought I would, with strong reservations.
But here’s the thing of the late 1990’s: the big usual indicators were great for Clinton and for the regular Democratic hopes lifting all boats. But the rising tide grew out of the deep structural flaws in private finance, corporate and personal. And if the market never stood higher in human history as the measure of all value, and Wall Street was “closest” to the market, and the brightest people in the world worked at Wall Street “interpreting” that market (and had Ivy league degrees) – how would a regulator get the standing, inside their own brains, much less in the Darwinian world of political “standing,” to call a halt to practices they might have intuited as troubling? I say the Utopian strain of markets and market worshipping made this an impossibility – which is why regulators failed at every location, not just one or two and the private whistleblowers listed by the Finan. Crisis Inquiry Report have languished and disappeared from history for the most part.
And finally, who can forget the see-saw effect of this Market Utopianism: while the Status of Wall Streeters was truly Olympian, along with the rest of the Committee to Save the World, and that of the generic “entrepreneur” rose along with them, the status of the blue collar worker and their related institutions declined, tragically and massively, as did the lower reaches of the American middle class. It is true that blue collar workers owe a lot to Bill Clinton and will some day erect a monument to him; unfortunately, it will most likely not be in America. How about right outside the FoxConn complex in China, a joint project of the Chinese “unions” and Atari Democrats?
Readers who want to follow up on the fate of blue collar workers over the years can benefit greatly from the work of Tom Palley on trade and globalization, and who exactly drove it and where those trade imbalances come from.
And last but not least, if you want a fuller picture of the labor force, and labor “market,” I recommend the long years of labor of Randall Wray on the subject, who had his eye on the declining rate of participation in the workforce for many decades now, and who, along with others in the “Kansas City School” (a nice contrast with the Chicago School) have been working very hard uncovering the best of the long buried labor and work trends of the New Deal in their “guaranteed employment” program, with its echo of FDR’s first right in his long neglected “Second Bill of Rights” from 1944 (quite a year in famous economic texts, no?), the Right to a Job (along with the upgrading of work skills).
Enough. That’s my celebration of all that Bill and his Democratic worshippers have left out. It ought to inspire, from somewhere on the left, from labor’s depths, the equivalent of Ellison’s “Invisible Man.” Now who’s going to write that, it’s ripe, and long, long overdue?
Dear William Neil:
If yiou want to point to economists who said the Ivy Leagues Schools’ (And MIT’s) views of economics — and especially Samuelson’s neoclasical synthesis Keynesianism (that later gave birth to New Keynesianism) was wrong and these elite school’s teaching was pointing policies in the wrong direction, you have to go back to 1958 when Sidney Weintraub of the University of Pnnsylvania ( and my mentor and Ph. D advisor) published his excellent (though thoroughly neglected) book entitled AN APPROACH TO THE THEORY OF INCOME DISTRIBUTION.
This book correctly developed Keynes;s aggregate supply [Z-function] and aggregate demand function from Keynes’s General Theory and it showed how Keynes had derived these functions from Marshallian [ but not Walrasian] microeconomics. [After all Marshall had been Keynes’s professor of economics when Keynes learned his economics as an undergraduate]
In this book Weintraub showed how the Samuelson mi interpretation of Keynes’s analytical structure would lead not only to problems of employment but also income distribution . The book was widely denounced by that gem of Samuelson’s Keynesian school — Bob Solow.
No wonder no one — except students of Weintraub — ever read the book and benefitted from it!
And this is long before Minsky, the Kansas City School, Tom Palley etc —
Let the historical record be as full, and as old, as necessary. New name to me, thank you.
I like Robert Skidelsky’s corrective, that in the training of economists in the future, they get a good grounding in economic history before quantitative modeling begins.
I particularly liked the late Fernand Braudel’s discussion of the origins of the word capitalism, and the arguments about when markets and a market economy first emerged in Volume 2 of his “Civilization & Capitalism: The Wheels of Commerce.” It has a lot of surprises and a lot of material for those who worry, to paraphrase Wendell Berry in his 2012 Jefferson Lecture, that “the market,” and our current phase of economic life, are now devouring society. What quant model captures that notion?