Two Huge Flaws in the Legend of the Clinton Economy

Heritage Foundation ^ | September 7, 2012 | J.D. Foster, Ph.D

[Son House]

Two inescapable flaws mar the Clinton economic legend. One is conveniently papered over; the other conveniently forgotten. Even so, a flawed legend is better than the economic reality President Obama’s policies have produced, so it is no surprise the sitting President has outsourced his economic messaging to the former President.

The first flaw, described here and here, is that President Clinton raised taxes and the economy boomed. The flaw in the narrative is it ignores the passage of time—four years, to be exact. The timeline matters. Clinton raised taxes in 1993 just as the economy was set to take off from a recession, and instead job and wage growth sputtered for four years. The famous Clinton era boom started four years after the tax hike, in 1997, and was triggered at least in part by the Republican tax cut of that year. Four years may seem like a detail, but details like this matter.

The second flaw marring the Clinton economic story is recession. President Clinton did not leave his successor a booming economy. He left President George W. Bush a recession. The recession began in March of 2001, two months after Clinton left office. Even the most rabid leftist cannot blame George Bush for the 2001 recession. It was the Clinton recession.

So Bill Clinton came into office and raised taxes on an accelerating economy, and produced a lethargic economy. Republicans pushed through a tax cut in 1997 and thereby launched the famous Clinton boom. Then Clinton left his successor with a nasty recession. And from this is fashioned a legend of economic performance. Damage done on both ends and a prosperity at least shared by Republicans—and yet the legend lives on.

As long as the legend endures, President Obama sensibly would want to set aside past differences and wrap himself in the Clinton flag. Obama’s alternative is to defend his own record, which he simply cannot do, even giving himself a grade of “incomplete” while his wife pleads for “more time.”

Incomplete after four years? More time to press the case for higher spending, higher taxes, and more regulation, all of which have served only to restrain the most prosperity-oriented economy in the world?

President Obama can be given credit for trying to apply his economic philosophy with fervor and conviction. His has been an all-in presidency from the start. He tried his best, but his approach failed anyway, as was inevitable; a fact reinforced yet again with today’s jobs report showing an unemployment rate of 8.1 percent and 12.5 million Americans out of work.

These statistics don’t tell the whole story, however. The workforce itself shrunk dramatically since Obama took office, as many Americans have given up looking for jobs that are nowhere to be found. The failure was not for lack of thought, or of effort. The failure was assured at the start as a failure of conception. Continuing to follow a bad design can only produce more bad outcomes. In the meantime, with neither a record from the past or a program for the future to tout, outsourcing his economic message to Clinton is about all Obama has left.

[mjp]

I still believe that the best thing government can do is get out of the way and let Americans be Americans. The government only messes up everything when they try to get involved in America’s business.

And the amazing thing is that the Physiocrats knew this around 250 years ago.

[Bob]

What caused the recession of 2001 when Clinton left office?

Primarily, the bursting of the dot com bubble that had made "his" economy look so good.

[conservative sympathizer]

Didn’t Slick Willie “inherit” his economy from Reagan and Bush 1?

Sure, and the massive amounts of capital used to fund the boom came from high-income earners that didn't have to give that money away to the state.

When marginal rates were high, capital was more difficult to concentrate. Leftists like that, but it means investment is more difficult.

The internet boom occurred because there was money to invest in technology. Higher marginal rates would have siphoned away those dollars. Part of Reaganomics included lower marginal rates.

[danielmryan]

Thanks for bringing up the hidden part of the Clinton spin. It's hidden because of the all-or-nothing emotionalism that comes with bubbles. When the Internet/tech bubble was roaring, the Internetization of retail and supply chains would purportedly eliminate scarcity and deliver us all to unicorn-and-rainbow land :) I had a ringside seat to the mania in '99, and I remember seeing claims that became more and more unbelievable as the bubble roared to its climax. The funny thing about that era was, the contrarian who saw "unbelievable" as a get-out signal would have been sitting on his hands for more than a year while the bubble kept roaring. The specifics now elude me, but I recall seeing several too-good-to-be-true bubble narratives as '99 turned into '00.

And...as human nature would have it, the emotionalism flipped on its head when the bubble came crashing down. The good that the tech industry acomplished was buried in the subsequent revulsion.

That flip-flop emotionalism is part of every bubble. Gold had a bad rep in the 1980s even though it went from $300/oz in '82 to more than $450/oz in '87. With the market crashes of '87 and '89 came the claim that the Reagan prosperity was all illusory. It never changes.

[OldEarlGray]

Bush's fault?

 

 

"We didn't truly know the dangers of the market, because it was a dark market," says Brooksley Born, the head of an obscure federal regulatory agency -- the Commodity Futures Trading Commission [CFTC] -- who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country's key economic powerbrokers to take actions that could have helped avert the crisis. "They were totally opposed to it," Born says. "That puzzled me. What was it that was in this market that had to be hidden?"

http://www.pbs.org/wgbh/pages/frontline/warning/view/

 

NOT.

[driftless2]

Actually, Clinton is chiefly responsble for the financial disaster of 2008. He was the dope who pushed Carter’s CRA after Reagan and Bush ignored it for twelve years. His justice department was the one that threatened banks and lending institutions with sanctions if they didn’t offer loans to unqualified people. Hence, the subprime mortgage programs and ensuing fiasco during the Bush admin.

[Alberta's Child]

Good points, but I'll take it one step further. The biggest factor in the dramatic growth of the late 1990s was the combination of the Clinton tax hikes of 1993 and the Republican tax cuts of 1995 and 1997. This is important to remember because the passage of time does matter -- and the sequence of these tax policy changes have implications. A key consideration here is that most of the later tax changes did not undo the earlier tax hikes.

In other words, most of the taxes the GOP cut in 1995 and 1997 (capital gains tax rates, in particular) were not the same taxes as the 1993-94 tax hikes (income tax rates, the taxation of Social Security benefits and the Federal motor fuels tax, for example). By the time 1997 rolled around the U.S. tax code was set up so that there was a large gap between income tax rates and capital gains tax rates -- especially for high-income earners.

This is what drove so much of the capital investment of the late 1990s. It also made some investments very attractive even though they were highly speculative in nature (dot-com stocks that were selling at exorbitant prices even though the companies didn't make any money, for example!). Once the dot-com bubble burst, real estate became the next speculative investment of choice.

Mind you ... this was not necessarily good for the U.S. economy in the long run, as we've seen in the last few years.

[BfloGuy]

So Bill Clinton came into office and raised taxes on an accelerating economy, and produced a lethargic economy.

The author is correct that the economy sputtered during Clinton's first term. He is also correct to remind us of the 1997 capital gains tax cut.

But he is wrong to say that Clinton [whom, by the way, I despise] caused the "Clinton" recession. That was the result of the inevitable crash following Alan Greenspan's money-printing spree that led to the so-called Dot-com boom.

The Fed causes crashes, not presidents.

The Fed caused the 2008 crash (aided and abetted, of course, by Democrat housing policies.) Now, Obama couldn't create a recession, but he has been very successful at keeping one going.

A president can spur or depress the economy by his policies; but it's unfair and inaccurate to claim he can make an economy crash all by himself.

[Alberta's Child]

I know he's gotten some well-deserved criticism as a financial guy, but radio host Bob Brinker had it pegged as far back as 1997-98. He was not prone to demean his callers, but I'll never forget one segment of his show where he warned about the speculative nature of dot-com stocks and advised his listeners to pay close attention to the P/E ratios of these prominent companies whose stock prices had run up through the roof. This caller got on the air and went into an emotional diatribe in which he was very dismissive of Brinker's warnings, and insisted that "P/E ratios don't mean anything in the modern economy" (or something very close to that.

Brinker let the guy rant for a while, thanked the guy for his input, then ended the call. After a brief pause, he said: "There you have it, folks. I don't think I can offer you any better evidence that we're in a 'tech stock bubble' than what you've just heard from that caller."

[Alberta's Child]

When the Internet/tech bubble was roaring, the Internetization of retail and supply chains would purportedly eliminate scarcity and deliver us all to unicorn-and-rainbow land.

One of the smartest investors I've ever known was a guy who managed a private equity fund, and his investment approach in the late 1990s was based on this very thing. But once I saw how he put this approach in action, I realized just how a successful, astute businessman works.

HIM: "Internet retailing is going to change the world, AC. Within 15-20 years you're never going to buy a currently-published book in a bookstore. It's all going to be done over the Internet. That's why I'm investing the way I am."

ME: "But you still have a lot of risk because you don't know which online retailers are the best investments. Take your book example ... How much of your portfolio is in Amazon.com?"

HIM: "None."

ME: "So you're investing in Borders.com?"

HIM: "No."

ME: "BarnesAndNoble.com?"

HIM: "Nope."

ME (totally confused): "Then which Internet retail stocks are you buying in that sector?"

HIM: "None of them, since I only expect one of those three to be around in ten years and I don't know which one it will be. Instead, I'm buying shares of FedEx and UPS ... because those companies will do well regardless of which Internet retailers succeed."

Smart man, my friend is.

He further confirmed it by selling off all of his company's residential real estate holdings in 2007 -- right before the crash in 2008.

[TwelveOfTwenty]

But he is wrong to say that Clinton [whom, by the way, I despise] caused the "Clinton" recession. That was the result of the inevitable crash following Alan Greenspan's money-printing spree that led to the so-called Dot-com boom.

The dot.com boom happened because of three things:
1) The end of the Cold War opened world markets.
2) The technology advanced to the point where ecommerce, IE amazon.com, egghead.com, and the dot.coms offered by many national retailers, could occur.
3) Y2K, which was a 300 billion dollar "stimulus" all by itself.

The need to set up and program all of this led to the creation of many tech jobs.

The tech bust occurred when the servers were set up and programmed, and the older mainframes could tell the difference between years 1900 and 2000. After that, most of the techs were let go, and the bubble burst.

The bust was no more anyone's fault than the tech boom was anyone's doing. It was just a natural evolution of our technology and society.

The point is that Clinton's "economic policies", if there ever were any, had nothing to do with the boom. Take away ecommerce and Y2K, and Clintonomics would look a lot like Obamanomics.

One of the major causes of our current economic problems, which no one notices because we're all used to seeing it, is the demise of the US auto industry. We're fed news of how the US auto industry has recovered, but let's get real. in the 70s, GM had around 50% of the US market all by itself. Now, all three US makes are doing good just to get 50% OF THEIR OWN MARKET, and that's assuming you count Fiat owned Chrysler as a US make.

The tech boom couldn't continue forever because there would have been no reason for it to, but if Americans had bought American cars instead of foreign cars during the 2000s when the economy was once again booming, the economy might not have collapsed. Who's to blame for this (I blame the UAW) is up to you.

[danielmryan]

Did he get that idea from Peter Lynch? One of Lynch's stock stories was, the only sure way to get rich in a gold rush is to sell mining supplies. You get paid regardless of which properties pay off.

[BfloGuy]

The tech boom couldn't continue forever because there would have been no reason for it to, but if Americans had bought American cars instead of foreign cars during the 2000s when the economy was once again booming, the economy might not have collapsed. Who's to blame for this (I blame the UAW) is up to you.

The tech boom and bust happened because the Federal Reserve printed so much money. As is almost always the case, that money ends up in the stock market [or other assets like, oh, say, housing.] The market soars and bad investments are made.

I share your dislike of the UAW but free trade had nothing to do with it.

[Intolerant in NJ]

The recession began in March of 2001, two months after Clinton left office...but it was clearly on the way in the spring of 2000 when the Clinton/Dotcom bubble burst, and the NASDAQ dropped from 5000 to 1500 - just one of a number of messes - like the damaged economy after 911 and the refinancing of the military, weakened by the spending of the "Peace Dividend" - George Bush had to clean up......

[TwelveOfTwenty]

The tech boom and bust happened because the Federal Reserve printed so much money.

Do you honestly believe that ecommerce and Y2K, and the jobs they created, would not have happened without Federal Reserve money? Or that all of those COBOL programmers would have been retained if more Fed money was thrown at Y2K after 2000?

I share your dislike of the UAW but free trade had nothing to do with it.

I didn't blame free trade, or the foreign companies that sell cars here. I blame the poor quality of American cars that resulted in losing half of the home market to foreign makes.

[Gene Eric]

The dotcom BOOM!!! never happened.

[Gene Eric]

CRA, dotcom, and defense failures leading to 9-11. The best Presidential tenure ever...

[BfloGuy]

Do you honestly believe that ecommerce and Y2K, and the jobs they created, would not have happened without Federal Reserve money? Or that all of those COBOL programmers would have been retained if more Fed money was thrown at Y2K after 2000?

Ecommerce and Y2K would have happened without Fed money. That's certainly true.

But Y2K turned out to be overstated [full disclosure: I made a lot of money on Y2K projects. I knew COBOL!] But the Y2K thing had nothing to do with Fed money-printing.

The Dot-com bubble, though, was a result of monetary inflation leading people to invest in foolish projects.

The Internet would have happened without Fed interference -- sooner probably. And without the recession.

[TwelveOfTwenty]

But Y2K turned out to be overstated

I think a better description is averted.

The Dot-com bubble, though, was a result of monetary inflation leading people to invest in foolish projects.

That's obvious now, but it wasn't to many at the time. Some were predicting NASDAQ 10,000, and everyone wanted a piece. That NASDAQ was advancing for specific and temporary reasons wasn't clear to many at the time, although it's clear now.

[genghis]

if clinton was so great
how do you explain one of the greatest elections in american history
1994??