February 14, 2016
Ross Douthat used his NYT column to remind progressives of the 1990s and harangue them for not wanting them back. While he gets some of the points right, he misses a really big one: the 1990s prosperity was driven by a stock bubble, which would inevitably burst. Furthermore, Clinton’s policies lead to an over-valued dollar and a large trade deficit that persists to this day. This trade deficit has made it impossible to get to full employment without an asset bubble.
Just to briefly recount the good stuff, we saw the unemployment rate fall to 4.0 percent as a year round average in 2000. In the early and mid-1990s the consensus within the mainstream of the economics profession was that the unemployment rate could not get much below 6.0 percent without sparking inflation.
The low unemployment rate disproportionately helped those at the bottom. This was the only period in the last forty years in which workers at the middle and bottom of the wage distribution saw sustained gains in real wages. African Americans were actually closing the earnings gap with whites and women were reducing the earning gap with men.
There were many positive things that can be said about the economy in President Clinton’s second term, but the problem was that it was not sustainable. The stock bubble that generated the demand that made low unemployment possible would inevitably burst. There is a limit to the number of fools with the money to pay billions of dollars for the stock of companies that will never make a profit.
When the bubble did burst in the years 2000–2002 it gave us a recession, which was very severe from the perspective of the labor market. We didn’t get back the jobs lost in the downturn until January of 2005. Until the collapse of the housing bubble this was the longest period without net job growth since the Great Depression.
It is important to note that the problem was on the demand side. There was no evidence of serious supply side constraints when the unemployment rate fell to 4.0 percent in 2000. In other words, there is no reason to think that if we got enough demand in the economy, we could not again see the sort of strong and broadly shared growth of the late 1990s.
However, it is precisely on this issue of generating demand that Clinton left us with an enormous problem. When he was Clinton’s Treasury Secretary, Robert Rubin explicitly advocated a high dollar. This was a sharp departure from his predecessor as Treasury Secretary, Lloyd Bentsen, who was willing to let the dollar fall as a way of reducing the trade deficit. A lower dollar, and therefore a lower trade deficit, was supposed to be one of the fruits of Clinton’s deficit reduction program.
The dollar did in fact rise after Rubin became treasury secretary, but really took off following the East Asian financial crisis. Robert Rubin and the rest of the Clinton team directed the bailout from the crisis through the I.M.F. Instead of requiring debt write-downs by creditors (i.e. banks), they demanded that the crisis countries repay their loans in full.
The route to repayment involved a sharp devaluation of their currencies against the dollar, which allowed them to run large trade surpluses with the United States. Several other developing countries also begin to rapidly accumulate foreign exchange reserves (i.e. dollars) to avoid ever being in the same position as the East Asian countries. The result was a sharp rise in the value of the dollar and an explosion in the size of the trade deficit. It went from just over 1.0 percent of GDP in the mid-1990s to almost 4.0 percent of GDP by the end of the Clinton administration ($720 billion a year in today’s economy).
The U.S. has had a large and persistent trade deficit ever since Clinton left office. This deficit creates a huge gap in demand in the economy since it amounts to demand that is being generated by the United States in other countries rather than the United States. The stock bubble filled this demand gap in the 1990s. The housing bubble filled the demand gap until it burst in 2007–2009.
We could fill the demand gap with large budget deficits, but no prominent political figure in either party is advocating deficits of the necessary magnitude to fill the gap in demand created by the trade deficit. (The tax cuts promoted by the Republican presidential candidates would likely lead to large deficits that could fill the demand gap, but they deny their plans would increase the deficit.)
We could also go the route of trying to get back to full employment by reducing supply. For example we could try to reduce average work-time per worker with shorter work weeks and longer vacations. Senator Sanders has proposed measures along these lines in his campaign (in addition to a plan for paid family leave, he is also proposing paid sick days and paid vacation), but most politicians have not been looking in this direction.
In short, the Clinton administration left us with a huge problem. The economy suffers from a huge gap in demand as a result of the large trade deficits that were a legacy of the Clinton era. It appears that the only politically viable way to fill this gap is with asset bubbles, which don’t end well. So progressives and other people have good reason not to be thankful for the economic policies of the Clinton years.
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