No Santa Claus and Bill Clinton Was Not an Economic Savior
By 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 Clintonís 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 2 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 todayís economy). This
is borne out in the Commerce Departmentís 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 following the collapse of the stock bubble just as it
was reasonable for President Obama to turn to fiscal stimulus
following 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 like education and
The growth of 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 didnít 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 countryís 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 doesnít 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. Thatís
something, but until there is someone in this debate who isnít pushing
policies that redistribute before-tax income upward, the vast majority
in this country can only lose.