Committee Of Correspondence

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

Peter Passell
9:10 a.m.  Monday  9/9/96 

       Keynes is in the deep freeze. Outside of extraordinary times–the oil shocks of the 1970s, wartime mobilization, the Depression–the White House has only a marginal impact on the business cycle. The Federal Reserve has more, but not as much as is generally perceived (that’s another story.)
       Clinton has not been tested by any exceptional economic shocks, and thus doesn’t deserve much credit for the good economic news or blame for the bad. Much doesn’t mean none, though. The president’s deficit reduction package in 1993 took some pressure off the Fed, allowing it to steer a less risky course that lowered unemployment without any increase in inflation.
       How well is the economy really doing? It’s easy to do a best-of-times, worst-of-times number here–low unemployment and stable prices, contrasted with stagnant real wages. I would put it in somewhat different terms. Living standards, no matter how you slice them, are at an all-time high. If Americans weren’t psychologically hooked on the idea that “progress” was their due, some fiddling with income distribution through changes in tax burdens and government spending could reduce social tensions.
       But that is not about to happen, and no one knows how to speed growth without major sacrifices in current living standards. Some of the stuff Dole is proposing–regulatory reform, tort reform–could make a difference, as could radical tax reform. But not a huge difference, perhaps a few tenths of a percentage point on the growth rate for a few years. That’s roughly the magnitude of the gains from airline, trucking, rail and energy deregulation, which made a barely noticeable difference in the 1980s.
       Add to this 1) the fact that budget entitlements will go through the roof as the baby boomers age 2) defense spending marches on driven by corporate welfare considerations 3) savings rates are stuck in low single digits and America’s economic future does not look particularly bright, no matter who is elected. Alan S. Blinder
10:13 a.m.  Monday  9/9/96 

       If we restrict ourselves to the cyclical situation, as I will in this opening comment, I fail to see how anyone can say we are “in the tank.” The truth is that, cyclically speaking, the U.S. economy is now about as good as it gets. We have enjoyed both (approximate) full employment and amazingly steady and low inflation for two years now. When I went on the Federal Reserve Board in mid 1994, I warned every reporter who asked that achieving the legendary “soft landing” was a long shot, not to be expected. But it has been done–and it has lasted.
       The only debatable question is how much the Clinton administration has contributed to the great success story. One view, I know, holds that all credit is due the Fed for its expert macroeconomic management. Far be it from me to deny credit to the Fed, which has doubtless played a central role. But monetary policy is not made in a vacuum. Fiscal and monetary policy interact in many ways, including the fact that both affect interest rates.
       Most observers recognize that the remarkable decline in long-term interest rates from the fall of 1992 to the fall of 1993 is what kick-started a previously lackluster economic recovery into sustained growth. Remember that the paltry growth of the first half of 1993 (below 1 percent at an annual rate) had many people talking about the possibility of a triple-dip recession. Remember also that, allowing for the normal lags, the drop in interest rates should have boosted growth late in 1993 and throughout 1994. And remember, finally, that the bond market rallied with no change in monetary policy. Does anyone seriously doubt that the Clinton administration’s large, credible deficit-reduction plan of 1993 was the driving force behind the lower long-term interest rates?
       In addition, Clintonomics gave monetary policy a helping hand in several ways. First, deficit reduction helped solve the long-standing problem with American stabilization policy: the perverse policy mix. Acting independently but in consonance, the Clinton administration and the Fed together delivered what economists had long prescribed: tighter fiscal policy (lower deficits) compensated for by easier monetary policy (lower interest rates). Deficit reduction–which, we must still remember, curbs spending–allowed the Fed to maintain its easy monetary policy longer. Under a less responsible fiscal policy, the Fed probably could not have kept short-term interest rates at 3 percent as long as it did. Second, and related, the Clinton administration has been religiously respectful of the Fed’s independence. It must be the least Fed-bashing administration in memory–which helps the Fed do its job better. Finally, leaving me aside, President Clinton has made superb appointments to the Federal Reserve Board.
       Ask yourself this: If you were running the Fed, what more could you have asked for? When the monetary policy academy awards are given out, the Clinton administration should be honored as “best supporting administration.” William Niskanen
11:49 a.m.  Monday  9/9/96 

       Several professional peeves:

  • I understand why Democrats use the phrase “the Reagan-Bush years,” but I am perplexed why my Republicans friends do so. Reagan’s policy objectives were to reduce domestic spending, taxes, and regulation, and he realized each of these objectives to some degree. Bush’s objectives were never very clear, but his actual policies increased domestic spending, taxes, and regulation. On the basis of their respective economic policies, it is much more accurate to group the Bush-Clinton years than the Reagan-Bush years.
  • Comparisons of the real GDP and employment growth rates should be adjusted for changes in the working-age population, since the potential workforce is substantially invariant to economic policies for many years.
  • There is generally some lag between the time policies are proposed and when they affect the economy, so an administration should not be credited or blamed for economic conditions in its first year.
       The table below presents some interesting comparisons that incorporate each of the above points.
Annual Percentage Change
Real GDP (per adult, ages 20 through 64.)
Civilian Employment
0.20.7 0.1
       It’s too bad that the Gipper is not on the ballot. Alan Murray
2:29 p.m. &Monday;DAY  9/9/96 

       The only thing “in the tank,” at the moment, is Bob Dole’s campaign. Unemployment, inflation, interest rates, and a number of other important economic variables all look the best they have in nearly three decades. It will be extremely difficult for Bill Clinton to avoid reelection with this kind of an economic wind behind him.
       But it will also be extremely difficult for Bill Clinton to avoid a recession in his second term. In two hundred years of American history, we’ve never had a recovery that lasted longer than nine years, and it’s not likely this will be the first. Once the recession comes, all of Mr. Clinton’s fine economic numbers will turn south. What will he say then?
       It’s a shame that the nation’s political/economic debate has to get stuck on such sterile ground. The debate should not be over which four, eight or 12-year period produced the best macroeconomic statistics. Rather, it should be about what we know to be the pressing issue. For more than two decades, through Democratic and Republican administrations alike, the earning power of the average American worker has been stagnant. People without college education–men, in particular–find they can no longer count on their ability to support a family in a solid, middle-class fashion. For a huge class of Americans, the dream of steadily rising living standards has disappeared.
       One manifestation of this has been a steady rise in income inequality. For the first two decades after World War II, the gap between those at the top of the income scale and those at the bottom narrowed. But in the ‘70s, ‘80s and first few years of the ‘90s it widened. Bill Clinton has taken some actions at the margins to alleviate this–most notably, increasing the Earned Income Tax Credit for the working poor–but there’s no indication that he’s done anything that has changed the trend. In fact, the figures for 1993 and 1994 suggest the trend toward inequality has worsened in the Clinton years, after a brief hiatus in the otherwise dismal Bush years.
       The strain this is putting on our society is clear. The “angry white men” that we hear so much about in the political debate are in fact the very people who’ve been at the losing end of this two-decade-long trend. The current fine state of the macroeconomy has muted their complaints; but when the next recession comes, who doubts they’ll be back louder and angrier than ever?
       Twenty-year trends can’t be undone in four. This is a long-term problem, and requires sustained, long-term solutions. As long as we insist on measuring a president’s economic policy by the performance of macroeconomic variables during his term, we’ll not make much progress. Many economists argue Ronald Reagan’s nice economic numbers came partly at the cost of a ever-widening budget deficit, and the economic performance of presidents Bush and Clinton was limited by the need for deficit-reduction measures in 1990 and 1993 to clean up that inherited mess. Clearly, a longer-term perspective is needed.
       Bob Dole and Bill Clinton, of course, both talk about the longer-term problem. And if you strip away their confusing rhetoric, the programs they offer to deal with it are profoundly different. Mr. Dole takes the view that the best way to boost the long-term performance of the economy is to sharply reduce the size of government by starving it of tax revenues. Under his plan, the federal government, which now spends about 21 cents out of every dollar in the economy, would drop to 18 cents. Bill Clinton’s budget plan would reduce the federal government to something like 19 cents of every dollar, but no one–his own cabinet members included–believes he’s truly committed to that goal. Listen to Mr. Clinton’s convention speech and it’s clear that this is a man who believes the government can do many things, even if they are small things, to help guide and nurture the economy. When he talks about tax cuts, he is talking about targeted tax cuts designed as a way for the government to encourage certain sorts of behavior, or to reward the less fortunate. Tax breaks and government spending programs are merely two different levers of the government’s power, both of which can be used to good affect in Mr. Clinton’s view.
       Who’s right? No dissection of the economic statistics of the last decade and a half is likely to provide a satisfactory answer to that question. Herb Stein
4:37 p.m.  Monday  9/9/96 

       One thing we need to clear up is whether it is possible and necessary to distinguish between the cyclical performance of the economy–when it moves from the bottom of a recession to the top of a recovery and back–and the longer-run structural performance of the economy. In assessing the performance of the economy in a period when unemployment is stable, is it significant to compare it with a period in which unemployment fell substantially? Three of our panelists seem to agree that the distinction is necessary. I am not sure whether Niskanen does. He offers us a comparison between a period in which unemployment fell from 9.7 percent to 5.3 percent and a period that began and ended with unemployment around 5 1/2 percent.
       Pending further elaboration on this point perhaps we may start with the cyclical position. Blinder says that the current combination of low unemployment and low inflation is highly satisfactory, at least by the standard of what the past 25 years have led us to expect. I hear no disagreement about that from this panel. There have been statements from Republican sources that the current recovery is the weakest ever. The significance of that is hard to evaluate because of the differences of the conditions in which recoveries have occurred, including the depth of the recessions from which they started. Perhaps we will return to that question later.
       If the current cyclical position is taken to be satisfactory two questions remain. Who, if anyone, gets the credit for this condition? What about the other aspects of the economy–essentially real per capita incomes and their distribution? Murray, particularly, calls attention to this second question, and I assume Blinder’s opening remarks to mean that he intends to come to this question.
       What do the panelists have to say about Blinder’s argument that Clinton’s reduction of the budget deficit led to, or at least importantly contributed to, the cyclical recovery of 1993 to 1996. Here Passell says the magic word, “Keynes.” Presumably few of us any longer believe that reduction of the budget deficit is, by itself, necessarily depressing to the economy. Have we come to the point of believing that reduction of the budget deficit is, by itself, stimulating? Blinder seems to argue that reduction of the budget deficit enabled the Federal Reserve to follow a policy of lower interest rates, which stimulated the economy. Could one also say that reduction of the budget deficit had a depressing effect on the economy that required the Federal Reserve to ease monetary policy in order to offset it? The Clinton administration did not always believe that deficit reduction was stimulating. Some of us remember the deficit-raising stimulus package of early 1993. There have also been times when the Clinton administration warned that reducing the deficit too fast would depress the economy. Perhaps we could have some exploration of this before going on to the issues of long-term growth of incomes and their distribution.