There is no Santa Claus and Bill Clinton was not an economic savior
from Dean Baker
The truth is often painful but nonetheless it is important that we live in the real world. Just as little kids have to come to grips with the fact that there is no Santa Claus, it is necessary for millions of liberals, including many who think of themselves as highly knowledgeable about economic matters, to realize that President Clinton’s policies sent the economy seriously off course.
In Washington it is common to tout the budget surpluses of the Clinton years as some momentous achievement, as though the point of economic policy is to run budget surpluses. Of course the point of economic policy is to produce an economy that improves the lives of the people in a sustainable way. Clinton badly flunked this test.
The Clinton economy was driven by a stock bubble. This is not a debatable point. The ratio of market-wide stock prices to corporate earnings was well over 30 to 1 at the peak of the bubble in 2000. This is more than twice the historic average.
This run-up in stock prices drove the economy in two ways. First, since any good huckster could make millions selling shares in dot.whatever, we had many hucksters starting nutball businesses that never had a prayer of making a profit. This is not much of a long-run economic strategy, but in the short-term it led to an increase in investment.
The other way that the bubble drove the economy is through the wealth effect on consumption. The run-up in stock prices generated roughly $10 trillion in bubble wealth. The wealth effect from stock is usually estimated to be 3-4 cents on the dollar. This would mean that the bubble generated between $300 billion to $400 billion annually in additional consumption. This would have been 3-4 percent of GDP at the time ($480 billion to $560 billion annually in today’s economy). This is born out in the Commerce Department’s data, which show that the saving rate fell from close to 7 percent at the start of the 1990s to around 2.0 percent at the peak of the bubble in 2000.
This was the economy that President Clinton handed to President Bush in January of 2001. It was an economy that was being carried by an unsustainable bubble that in fact already was in the process of deflating at the time Bush took office. The S&P 500 was more than 10 percent below its 2000 peak, and the NASDAQ was down by more than 40 percent on the day that Bush took office. This pretty much guaranteed the recession that began in March of 2001 just as the collapse of the housing bubble placed President Obama in the middle of terrible recession in January of 2009.
The 2001 recession was the main reason that the surplus vanished in the 2002 fiscal year. Directing tax cuts to the wealthy was a foolish policy response to the downturn, but it was reasonable to turn to fiscal stimulus after the collapse of the stock bubble just as it was reasonable for President Obama to turn to fiscal stimulus after the collapse of the housing bubble. The Bush tax cuts did provide a boost to the economy; although they would have provided a larger boost if this money had been directed at moderate and middle-income people or devoted to long-term investments such as education and infrastructure.
The growth of the housing bubble eventually provided the boost needed to recover from the 2001 recession, just as the stock bubble propelled growth in the 1990s. As the economy got back near full employment in 2006 and 2007, the deficits shrank to sustainable levels.
However, while the deficits were sustainable in the later years of the Bush presidency, the housing bubble was not. Its collapse gave us the most predictable economic disaster in human history, even if all our top economists somehow didn’t see it.
To have a sustainable growth path we have to reverse one of the other central policies of the Clinton years, the over-valued dollar. This policy, which was put in place when Robert Rubin became Treasury Secretary, ensured that we would have large trade deficits. The trade deficits were good news for Wall Street with its obsession over inflation. It was also good news for companies looking to move operations overseas to take advantage of cheap labor.
However, the high dollar was terrible news for the country’s workers who were placed at an enormous competitive disadvantage. It resulted in the loss of more than 4 million manufacturing jobs. It was also bad news for anyone who doesn’t think that bubbles are a clever way to drive the economy.
Rubin and his allies control the Democratic Party with their money at the moment. Their financial power will not be easily overcome. However, it is important that people understand that the Rubin-Clinton team is every bit as much about redistributing money from the rest of us to the very rich as the Republicans.
The big difference is that, unlike the Republicans, the Rubin-Clinton crew believes that the rich should have to pay their taxes. That’s something, but until there is someone in this debate who isn’t pushing policies that redistribute before-tax income upward, the vast majority in this country can only lose.
What is sustainable growth? I think it is probably an oxymoron.
Are you sure that a high dollar is a big factor in the ills of the USA? That sounds like a simplistic way of looking at a complex problem.I think that globalization and free trade have played a large part and these are policies which have a lot of support in the American oligarchy.
Are you a part of that oligarchy,Mr Baker?
it is about time someone stood up and said Bill Clinton’s economic policies were not so good. And it is not suprising given his advisor as Sec. of Treasury Robert Rubin, and economic advisor, Larry summers whose mentor in politics is Robert Rubin.
I have noted in many writings including my book THE KEYNES SOLUTION, that in 1999 there were nto enough voted to repeal the Glass Steagall Act — but the 1999 Wall Street Journal reported then that Phil Gramm, (who I had a run in in the AER in the 1960s) then Senator , told the Citi lobbyist to contact Sandy Weil (then CEO of CitiBank)l to “call the White House and get [them] moving” to get them to back repeal via Gramm’s bill.
Slightly later Bill Clinton came out for repeal. Who did Sandy Weil contact? WE can not be sure but within a week Robert Rubin resigned as Sec. of Treasury and took big bucks job at Citibank.
Paul Davidson
Yes, the Clinton administration shares responsibility for continuing the policies of financial deregulation that exacerbated the intensity of our speculation-driven property market cycles. That said, these cycles have a long, long history, repeating every 18-20 years because of the failure to tame land markets of hoarding and speculation. Anyone who doubts this is directed to a study of Chicago’s land market history prepared in the 1930s by Homer Hoyt or to more recent research by British economist Fred Harrison, among others.
During the 1990s run-up of land prices, I saw first-hand at Fannie Mae that we were financing more and more land and less and less housing. Property markets become very dysfunctional and unstable when land-to-total value ratios rise above 25-30%. By 2005 appraisals in many metropolitan markets were commonly reporting ratios above 50%, and in cities such as Washington, DC, New York, San Francisco or Boston, ratios at high as 80% were not uncommon. Such land prices cannot be sustained unless there is an equivalent rise in household incomes, and household incomes have been stagnant or falling for all but the top 5% of households.
If anyone’s interested in the “take ” of someone who did NOT emphasize the stock market bubble (the book was finished in 1996) check out my book SURRENDER HOW THE CLINTON ADMINISTRATION COMPLETED THE REAGAN REVOLUTION. Dean was kind enough to give it a blurb and most people who’ve read it like it — but in the era of the Republican effort to impeach Clinton, virtually nobody wanted to review a book with that title. Thus, most people never even heard of it.
My “take” is that Clinton was walking the neo-liberal walk — and it wasn’t just the HIGH dollar, It was “welfare reform,” an emphasis on balancing the budget, NAFTA, no effort to support any efforts by organized labor to regain some of its pre-1980 strength, and a continuation of the trend towards increased inequality. Bob Pollin in CONTOURS OF DESCENT makes the same point about Clinton being a neo-liberal, but he also emphasizes as does Dean , the role of the dot.com bubble.
In fact, I think if the Republicans hadn’t been so rabid about attempting to impeach him, we would have had partial privatization of social security and Medicare “reform” before the end of Clinton’s second term — so Monica Lewinsky saved social security!
The reason why so many progressives (me included) supported Obama in the Democratic Primaries is because he was running against Hilary Clinton and we all knew what policies she would support. Of course we got the same policies anyway — but once again, because the Republicans are so rabid, there may never be a “grand compromise” that gives away Medicare while failing, once again, to truly reform Health Care in a way that contains costs.
If we are “lucky” the Republicans are going to be so extreme that Obama will not be able to “compromise” and our side may get some relief in terms of protecting what little is left of the New Deal and Great Society social safety net.
A far cry from dealing with the environment and disgusting inequality. For that there needs to be a movement such as existed in the 1930s (labor) and the 1960s (peace and civil rights).
Podargus, yes, any perpetual growth is unsustainable on a finite spherical planet, but eCONomists are trained to perceive the observable ecological system on which all live is based as subordinate to the human-conceived abstraction known as “the economy”. We are said to be able to use math to understand the way the economy functions while largely ignoring the biophysical/thermodynamic/exergetic limit bound conditions we don’t understand, don’t want to understand, or won’t be successful if we claim to understand when the more important task is submitting grant proposals to fund our graduate students to teach the patent drivel to unsuspecting undergraduates on which our livelihoods depend. Drivel out, money in, drivel out; wash, rinse, and repeat until budget goals are met or exceeded.
Well said, Edward. The US has created a gov’t-sponsored, neo-feudal, land tenure, manorial-like system in which the banksters, owned by the top 0.1%, monetize land scarcity rents until imputed compounding interest in perpetuity claims 100% of future wages, production, profits, and gov’t receipts, i.e., as in the case today as I type. All private debt-money today has a 100% claim on virtually all private US uneconomic output forever.
The overwhelming majority of US mortgagees are “dead pledgers”, i.e., neo-feudal, manorial land tenants who can never earn enough after taxes and subsistence to retire their debt obligations.
The banksters’ private fiat debt-money book entry credits are their money, not “our money”. The bottom 90% own nothing in the US (apart from personal possessions without liens), and increasingly not even their labor product, whereas the top next 9-9.9% below the top 0.1% only own secondary/subordinate private claims on principal private claims after the top 0.1% get theirs. They don’t realize it yet, but the next 9-9.9% own effectively debt-money credit liens against secondary claims on the labor, profits, and gov’t receipts of the bottom 90% and Fortune 25-100 firms.
Now we have the US gov’t committed to add another $9 trillion (more if recessions occur) to the public debt through fiscal ’21 with the nominal GDP since ’00 and ’07 growing at a trend rate of 3.7% and 2% respectively. At the GDP trend, net interest receipts as a share of total receipts will reach 20-25% and 35-40% after Social Security and Medicare receipts, a level that historically has been a threshold for moratoria on interest payments and defaults.
The cumulative compounding interest claim on all labor, production, and gov’t receipts is equivalent today to 60% of private wages and 100% of total gov’t spending less personal transfers. Total gov’t spending, including transfers, plus the “rentier tax” is an equivalent of 130% of public and private wages and 90% of private GDP. The productive economy is being buried by regressive and unproductive taxation on labor and production and by the “rentier tax” owing to the gov’t-sponsored land tenure privilege enjoyed by the top 0.1-1%.
As Henry George would have agreed, the English-speaking world is in desperate need of historic land reform and a shift of taxation from labor and production to speculative land tenure/resource rents, the latter of which discourage productive capital accumulation and production by increasing the value of land to a level that prevents productive investment at labor returns from competing with unsustainable, inflationary returns to speculative financial capital.
Alas, virtually all of the endowed chairs at uneconomic departments at leading universities are funded by the neo-feudal rentier caste on Wall St., the City of London, Australia, and Canada, and increasingly so in Asia, notably the Asian city-states. No eCONomist today who wants to make the lease payments on his BMW, Mercedes, Land Rover, or Lexus, his dead pledge payments on his urban/suburban/exurban McMansion, his children’s private school tuition, or his wife’s cosmetic procedures would dare suggest anything more than modest tweaking at the margins of the tax code or gov’t spending.
Why did Nature create eCONomists and politicians? To permit stand-up comedians and prostitutes to feel better about themselves.
What is the difference between a politician and an eCONomist? The former is paid to lie, whereas the latter doesn’t know that he has been educated and is paid to be incapable of telling the truth.
Why did the eCONomist cross the road? To get a free lunch at a conference he was paid to attend.
Why did the eCONomist cross the road with the duck? Quacks of a feather stick together.
Why do eCONomists often appear to be on a diet? They don’t like eating humble pie.
Why should you never ask an eCONomist for his opinion? He won’t give you “one”.
Mike writes: “A far cry from dealing with the environment and disgusting inequality. For that there needs to be a movement such as existed in the 1930s (labor) and the 1960s (peace and civil rights).”
The rentier oligarchic elite since the 1950s have been influencing policies to fund “educating” the working-class bottom 80-90% of Americans that they are “middle class” rather than to self-identify with those with whom they labor for wages. The fear by the Anglo-American elite during the Cold War was that the great working-class masses of Europe and the English-speaking world would self-identify with working-class values against the rentier caste and coalesce into a formidable politically powerful movement, the momentum of which might turn hard left to socialism or a system of worker-owned production and distribution.
There exists in the US the “potential” for private associations of individuals and disparate working-class groups to form into not-for-profit corporations and cooperatives to create savings banks or credit unions, occupational and work-sharing pools, insurance, child care, medical clinics, farmers markets, and an entire reorganization of the division of labor, distribution of income, and so on, and it need not be done from the top down at the federal level. Unions could theoretically lead in this regard, expect that labor unions tend to be exclusive in an attempt to limit competition and maintain wage rates, which by definition would preclude an organizations with such motives being exemplars for cooperation and solidarity with non-union organizations.
But the bottom 90% have virtually no savings or financial wealth and live effectively at subsistence after tax and debt service; therefore, they have no surplus with which to invest in the aforementioned institutions, and the top 0.1-1% like just the way it is.
Can anyone imagine an American Labor Party formed as a “corporate person” made up of a large plurality or majority of the bottom 90% working-class population who would demand ownership share of the means of production of goods, services, income, and purchasing power of the emerging intelligent-systems society/economy in which most paid labor will be replaced by automation over the next generation?
I don’t know… You say that the bubbles were bad things, but they look good to me. Funds flow liberally out of the hands of the very wealthy towards less wealthy programmers or builders. Excessive concentration of capital is prevented, as capital feels forced to seek investments. Demand is high, unemployment is low, confidence high, and the economy is generally operating at capacity. A spirit of euphoria prevails, if marred by consumerist excess.
This is not in jest. The bubble phase of the cycle looks the most like a desirable steady state. The volatility that characterises the bubble scares capital into a very liquid search for investments. That’s a desirable feature of a steady economy because it allows capital to fall onto new people and new technologies. Volatility under threat of obsolecense is the best market-based measure for capital redistribution. Stability with ever-concentrating capital is not the right thing. So bubble phases are good. Punishing payback phases (like now) are doing the damage.
The obvious counter-argument is that a bubble is by definition unsustainable. I disagree. It’s unsustainable in the accounting sense that the ever higher returns that investors expect aren’t recoverable. But it’s not real-economy unsustainable. The world didn’t run out of food or energy because of too many people coding for .com startups or building houses in Spain. The ecological unsustainability of consumption in the bubble phase is a distant second concern.
Pavlos,
Except that you cannot have a euphoric phase without the payback phase, to use your terms. Maybe I misread things, but I do not tend to associate some form of euphoria with the idea of the steady state. I have always associated it in my mind with the idea of cautious optimism.
How exactly does a stock or a real estate bubble avoid wealth concentration when it has all played out? It would seem that any assessment must include both the upswing and the downswing. The recent crisis resulted the emergence of a fewer number, but larger investment and commercial banks. The people who bought homes at bubble inflated prices certainly saw the destruction of their asset value during the downswing. Some were foreclosed (possibly fraudulently), some simply walked away and took the hit to their asset values and credit ratings. Obviously, this had disastrous consequences for the financial sector. Some folks did very well, and many lost out. It may in fact result in the destruction of wealth, but in this case many ‘banks’ were bailed out and many homeowners were chopped off at the knees. Result – subsidy to wealthy shareholders and incompetent bank management, and real economic distress for a large segment of the population, and an increased concentration of wealth at the upper end of the spectrum.
But the point is that such financial bubbles have real economic consequences. It seems that every now and then the return on real, physically productive projects proves insufficient for ‘investors’ who turn to other outlets. And while some wealth flows to dot com programmers, nobody in business does this out of the goodness of their hearts. That too is considered an investment for which business people expect a return. Some are inevitably disappointed, and then those programmers too are out of work and out of luck.
So the result is a credit crunch. Banks look to be increasing lending for the time being, since their excess reserves seem now to be falling (http://research.stlouisfed.org/fred2/series/EXCRESNS?cid=123).
It has resulted in a great deal of growth and economic prosperity overall, but in boom bust cycles. The institutional environment makes a great deal of difference. See the second paragraph above. However, it does seem to me that capitalist growth is unsustainable from an ecological point of view.