Committee Of Correspondence

Is the Economy Great or Terrible, and Who Did It?

Herb Stein
1:19 p.m.  Friday  9/6/96 

       The Democrats say that the economy is in great shape, and claim credit for it. The Republicans say that the economy is in terrible shape–Mr. Dole said recently that the economy is “in the tank.” They blame the Democrats and promise to do better. This week our panel will assess the state of the economy, and the degree of credit or blame that the Clinton administration may deserve.
       As background I will present a few statistics that seem relevant–not to answer the question but to indicate that there is a question.
       Today, in the middle of 1996, the rate of unemployment is lower than it has averaged in any year since 1970. The rate of inflation, as measured by the Consumers Price Index, is lower than in any year but one of the past 30.
       That these are good conditions, probably few would deny. The real problem arises in assessing what is happening to employment, real output, and incomes. And the problem arises because we have no satisfactory standard of what is par for the course–how much should we expect these magnitudes to rise to qualify as a good performance. For example, we have no good–or at least agreed upon–idea of what rate of growth of output the economy is capable of producing, and so we have no good measure of the extent, if any, by which the actual economy is falling short of its potential.
       One possible standard of comparison is the performance during the 12 Reagan-Bush years. So far in the Clinton administration real total output has risen at a rate of about 2.5 percent per annum, which is just about the same as the record of the Reagan-Bush years. As the Clinton team never ceases to say, jobs increased by 10 million during their period. In fact, the increase of employment during the Clinton years was somewhat faster than during the Reagan-Bush years, about 2 percent a year compared to about 11/2 percent a year. Productivity–real output per hour of work–rose much less rapidly during the Clinton years than during the Reagan-Bush years and, as an almost inevitable consequence, so did real compensation per hour of work. But real after-tax personal income per capita rose faster during the Clinton years, partly because the hours of work done per capita rose faster.
       These comparisons are affected by the fact that the Reagan-Bush period and the Clinton period are quite different in terms of the business cycle. The Reagan-Bush period begins and ends with unemployment around 7 percent and in between experiences first a deep recession, then a recovery and then another recession. The Clinton period is one of continuous recovery, from an unemployment rate around 7 percent to a rate of 51/2 percent (for the first half of 1996). In unemployment experience the years 1984 to 1988, approximately Reagan’s second term, were like the Clinton years 1992-1996. But in the 1984-1988 period employment, output, productivity, real compensation per hour and real per-capita after-tax income all rose faster than in the 1992-1996 period.
       In comparison with previous recoveries, the 1992-1996 recovery has been weak in gains of output and productivity. But it was a recovery from a very mild recession. It has brought the economy up to what is commonly believed to be near if not at full employment. And the Clinton years have been the only presidential term in this century, except for the Ford term and the Kennedy-Johnson period, that did not include the beginning of a recession. So far.
       For a discussion of these and other relevant facts about the economy, and for a consideration of who deserves whatever credit or blame is to be assigned, we turn to our panel.