How Much Credit Does Clinton Deserve for the Economy?

J. Bradford DeLong

The performance of the American economy in the 1990s has been amazingly good. There are rotten spots--continued stagnation in the wages paid for blue-collar and lower-skill white-collar jobs, growth in the number of the very poor, a large trade deficit that might become a problem in the future (but is not a problem now), and a stock market that is looking for a crash if continued good news does not validate giddily optimistic expectations. But overall the American economy in the 1990s has vastly outperformed everyone's expectations.

Does Bill Clinton deserve credit for this? Politicians are notorious for grabbing credit where they don't deserve it. Remember Michael Dukakis in 1988 taking credit for the then-boom in Massachusetts, even though the sources of boom long predated his arrival in the governor's chair. Remember Ronald Reagan at the end of 1984 taking credit for fast growth in the previous two years, even though the principal cause of rapid growth in 1983 and 1984 was the depth of the recession of 1982 that had been generated by the Federal Reserve's decision back in 1979 to fight inflation first no matter what the cost in shut-down plants or unemployed workers.

If you go ask Clinton (or, rather, his press secretary) you will be told three things: that Bill Clinton restored responsibility and put the underclass back on the road to inclusion in America with welfare reform, that he created jobs and expanded opportunities for Americans to export through NAFTA and GATT, and that he removed the dead weight of the deficit that had hobbled American economic growth. So let's look at each of these three.

Welfare reform is surely the oddest issue for Bill Clinton to try to take credit. It is true that since January 1994 the number of people in families receiving welfare--then called AFDC, now called TANF--has declined from 14.3 to 6 million. And the poverty rate which was above 15 percent in 1992 is now down below 12.7 percent. But extreme poverty is up: more people today live in families with incomes less than half the poverty line. And people who leave welfare do not move to stable work: in the eight months after leaving TANF, one in seven potential workers was not employed at all, and only one in three held a single job for all eight months. Off of welfare, yes. Into work, sort of.

Why the mixed picture on welfare reform? It was launched under the most favorable circumstances possible: the lowest unemployment rate and the fastest productivity growth in a generation. The principal reason is clear: not enough resources.

Back at the very start of 1993 then-Assistant Secretary of Health and Human Services David Ellwood warned Bill Clinton that welfare reform would be expensive: it was cheaper to pay single women with dependent children cash than it would be to equip them with the skills they would need to keep jobs, give them the help they would need to find jobs, and enable them to afford the day care they would need while they were at their jobs. Yet the welfare reform bill that Clinton signed in 1996 did not recognize this: it was an attempt to do welfare reform on the cheap. And because it was done on the cheap, it is best seen as an attempt to hand a political hot potato to someone else: "Here's the money the federal government has been spending on welfare," the 1996 bill said to the states, "now you figure out a way to spend this same amount of money and accomplish all these extra objectives."

Moreover, it seems likely that in the next decade we will try to do welfare reform even cheaper. At the moment the federal government has no effective role in TANF other than to hand money over to the states. Governors are happy to take credit for any good done with the federal money. Governors like to run against Senators and take their jobs away from them. Senators then ask themselves, "Why am I so eager to build the reputation of my future challengers? If this program were cut back, I could be getting credit for a tax cut." Programs which the federal government funds but does not control have always had short lifespan. It is a good bet that federal funding for TANF will be lower in a decade than it is now. And it is an open question whether--and which--states will take up the slack.

Thus on welfare reform Bill Clinton is in the worst of both worlds. Since the actual design and operation of the welfare reform programs takes place at the state level, it is the activist governors--mostly Republicans--of the leading states who will deserve the credit if in a decade we look back and conclude that welfare reform was a success. Since it was Bill Clinton who raised the issue and launched us down this road without committing adequate resources, it is he who will deserve the blame if in a decade we look back and conclude that welfare reform was a failure.

On international trade Bill Clinton deserves somewhat more credit. He did not have to spend scarce early political capital on rallying support for George H.W. Bush's NAFTA and for the Uruguay Round of the GATT. He did do so because he thought that these two trade agreements were good for America and for the world. Since the end of 1994, however, free trade has not been a high priority: little effort to win fast-track negotiating authority for a free-trade agreement with Chile (a country which we owe bigtime: it was our CIA that conspired to assassinate their General Schneider because he believed in Chile's constitution, thus setting the stage for General Pinochet who liked to herd people into soccer stadiums to shoot them and to plant car bombs in Washington's Sheridan Circle); insufficient preparatory work to launch a new round of trade negotiations at Seattle; and an overall unwillingness to be a pioneer on trade issues.

As WTO head Michael Moore puts it, the world will move toward freer trade only if industrial core demands for freer investment and higher payments for intellectual property are balanced by two sets of industrial core concessions. First, allow developing countries to export more agricultural products, more textiles, and more of other relatively low-tech manufactured goods like basic steel. Second, reassure developing countries that concern over labor and environmental standards will not be allowed to degenerate into yet another excuse for shutting out their products. Bill Clinton has not been a pioneer on these issues.

Clinton might respond that you can tell the pioneers by the arrows in their backs. But if you're not a pioneer, you don't claim credit for leadership.

Last--but most important--comes the deficit and the rate of economic growth. It had long been clear that whatever supply-side gains in productivity were produced by the Reagan tax cut were vastly outweighed by the negative consequences of high deficits that drained the pool of capital for financing investment and slowed economic growth. Depending on which set of economists you asked, the four percent of GDP or so that was diverted to buying government bonds to finance the deficit slowed American growth by between one-half and one percent per year. It had left America by 1992 between 4 and 8 percent poorer than it might have been had the budget been balanced.

Outside economists and economic advisors had been making these points for a decade before Bill Clinton took office. The argument that the economic health of the nation required spending political capital on deficit reduction was made in 1993 by Bob Rubin, Lloyd Bentsen, Laura Tyson, Lawrence Summers, and company. But it had been made back in 1983 by Martin Feldstein, David Stockman, and company. And it had been made in 1989 by Richard Darman, Michael Boskin, and company. Thus there is a good deal of truth in the claim that Clinton's fiscal policy was not a Democratic fiscal policy--indeed, Clinton at one point called it an "Eisenhower Republican" policy.

But there was an important difference between Bill Clinton and his predecessors. The difference lies not in the advice that he was given, but in the fact that he had the brains to understand it and the guts to follow through. The historical reputations of his predecessors will suffer from it. In retrospect the Reagan 1980s look like a period in which a strong business-cycle recovery from a deep recession was followed by half a decade of slow productivity growth as the deficit hobbled investment. In retrospect the Bush administration looks simply confused as different factions fight over the wheel: the read-my-lips faction of the beginning then replaced by the 1990-tax-increase faction, which was then repudiated by the Bush dynasty.

It is here that Clinton deserves full credit. Lifting the dead weight of the deficit from the economy cost him essentially all his political capital in 1993. And the rewards in terms of faster economic growth have been greater than anyone in 1993 would have dared predict. If unchecked, the deficit would have deprived the economy of $300 billion a year in total investment and $150 billion a year in high-tech investment. Economists will argue for decades to come over how much of the high-tech high productivity-growth boom we are currently experiencing is the result of the high-investment economy produced by the elimination of the deficit. It is a welcome change from the previous sport that academic economists played, that of assigning blame for relative stagnation.

The record all in all? A score of one and a half out of three. That's not a very impressive score, unless you recognize that the third is the most important. Trade is not all that important (yet) to the large and not very open American economy. Rapid economic growth opens up worlds of opportunity for the private sector and new worlds of possibility for the public sector. A richer America will be able to afford to do more, and will feel itelf able to afford to do more.

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