Minneapolis Star Tribune, January 15, 1999
As President Clinton’s approval ratings soar through the stratosphere even as the Senate prepares for the spectacle of his impeachment trial, the words of his friend James Carville have become immortalized: "It’s the economy, stupid."
The President himself has wasted no time in claiming credit for "the longest economic expansion in peacetime in the history of the United States," as it passed 93 months. But has President Clinton, or the policies of his Administration, contributed anything to the current business cycle expansion? Even the President’s Republican critics have often been reluctant to raise this question, because they like to pretend that balancing the Federal budget is essential to our economic well-being.
Let’s start with the balanced budget. There are basically two ways of looking at this from an economic perspective. The Keynesian view, which is still taught in introductory economics courses despite having been abandoned at the higher reaches of the profession, is that moving from a deficit to a surplus in the Federal budget would only slow the economy.
This is not all that difficult to understand: deficit spending creates demand for goods and services, and this spreads through the economy, expanding employment and income. When it comes to other developed countries like Japan, our policy makers are still very Keynesian: hence their prolonged nagging of the Japanese government to run larger budget deficits in order to stimulate their faltering economy.
The conservative view is more complicated. It starts from the assumption that the economy tends to operate at full employment, so deficit spending by the government can’t be expected to make the economy grow any faster. Just the opposite, according to this theory: government borrowing drives up interest rates and therefore "crowds out" private investment. So balancing the budget should lead to lower long-term interest rates, and therefore more investment. And an economy that devotes a greater proportion of its resources to investment will generally grow faster.
Let’s take the conservative assumptions as true, and see if balancing the budget could have contributed something here. Investment, as a share of our economy, is still at the same level as it was in 1989, the last business cycle peak. For long-term interest rates, economists look at the real rate-- that is, the interest rate minus the rate of inflation. The real rate of interest on a 30-year U.S. Treasury bond is also about the same today as it was in 1989. So it is difficult to see how the balanced budget could have done anything for the economy.
Are there any other Administration policies that may have contributed to economic growth? Welfare reform has certainly forced many poor, single mothers into the labor force. A fraction of them have found work, generally at wages that have kept them in poverty. But it would be very difficult to argue that these changes have helped the economy grow.
There is no question that NAFTA, which the President pushed through Congress at the end of 1993, has been a net loss to the U.S. economy. Prior to NAFTA, the United States had a trade surplus with Mexico of $1.7 billion; we are now running a trade deficit of more than $15 billion.
If the President’s major economic initiatives cannot be responsible for prolonging this expansion, what is? Two things, mainly: first, the stock market’s unprecedented expansion over the last decade. Although 86% of these gains went to the top 10% of the income distribution, these households have apparently gone on a consumption spree that has boosted the entire economy.
The second major influence has been the Fed’s loosening of monetary policy over the last four years. The Fed decided, after being overtaken by surprisingly strong growth, that it could allow unemployment to fall below its previously targeted level of about 6%, and it has continued to decline to its present 4.3%. But this important policy change, too, is outside President Clinton’s doing. In fact, when the Fed doubled short-term interest rates in 1994-95, for no good reason, the President (unlike some of his predecessors) said nothing.
The stock market’s ascent has all the markings of a speculative bubble. It appears that people are buying stocks because they believe that others will do likewise, driving prices out of proportion to any conceivable future earnings. Eventually this bubble will have to burst, or at least deflate.
In the meantime, the rising tide will continue to lift the President’s political boat, carrying it safely out of reach of his increasingly frustrated Republican pursuers. It may be just dumb luck, but he’ll take it.