Committee Of Correspondence

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

William Niskanen
9:03 a.m.  Tuesday  9/10/96 

       Cyclical conditions in the U.S. economy are more favorable than at any time in the past 25 years, a combination of conditions for which the Federal Reserve is primarily responsible. President Clinton’s main contribution to these conditions has been his uncharacteristic reluctance to nag the Fed. Administration flacks sometimes attribute these conditions to Clinton’s “leadership” in the 1993 budget deal, but they don’t have their story straight; interest rates are now significantly higher than when this budget was (barely) approved.
       The primary problem of the U.S. economy is that we are on a very slow growth path. Productivity has increased at only a 0.3 percent annual rate on Clinton’s watch, the lowest rate of any administration since Hoover. As a consequence, the growth of average real (inflation-adjusted) labor compensation has also been very low and average real wages have been stagnant. This is the primary reason, even with low unemployment and inflation, why many Americans are concerned about the economic future. This is the primary pocketbook issue on which Clinton’s record is vulnerable.
       The productivity growth rate has declined somewhat unevenly for 30 years, interrupted only by a temporary recovery during the Reagan years. President Clinton did not create these conditions, but he should be judged by what, if anything, he has done about them. As it has turned out, the Clinton administration and, more generally, the Democratic Party has chosen to defend the status quo against the types of policies that are necessary to increase productivity growth. Let me count the ways:

  • In response to the unions, Clinton has opposed school vouchers and a bill that would have relaxed the restrictions on management-labor cooperation in nonunion firms. In response to the trial lawyers, he vetoed bills to restrict shareholder suits and to reform product liability law.
  • Both Bush and Clinton chose to address the deficit more by increasing taxes than by restraining domestic spending. As a consequence, the top marginal tax rate on earnings was increased from 28 percent to 42 percent. For any given reduction in the deficit, however, the economic benefits of reduced spending are much higher than the benefits of higher tax revenues.
  • Most important, at almost every decision point, Clinton has chosen to side with the current beneficiaries of federal spending rather than with the interests of present and future taxpayers. He resisted a commitment to balance the budget and demagogued the congressional Republicans for their rather tentative effort to reduce the growth of Medicare spending. He has continued to oppose measures to reduce the tax bias against saving and investment. And Clinton has not even acknowledged the huge implicit debt of the social security and federal pension systems.

       In summary, Clinton has almost consistently opposed the necessary measures to increase the growth of productivity and real wages. Clinton is the status quo candidate in the 1996 election, defending those who benefit from bloated government at the expense of our children. On this record, Clinton has no claim to the mantle of compassion. Peter Passell
10:19 a.m.  Tuesday  9/10/96 

       As per Chairman Stein’s suggestion, I’ll stick with the cyclical issues. I’m in near-complete agreement with Blinder on the limited but positive role of the Clinton administration in the 1992-94 recovery. Even seen in the least flattering light, the fall in long-term interest rates after the administration committed to deficit reduction suggests that markets decided the president was a new-style Democrat who would make some political sacrifices to tidy up the fiscal mess and make a stand against inflation.
       I would amend the Blinder story in one way, though. The president, the Fed, and the rest of us have been beneficiaries of what appears to be a very substantial fall in the sustainable unemployment rate–sometimes called the “natural rate” or NAIRU–since the late 1980s. That made it possible for the Fed to continually test the growth waters, allowing the unemployment rate to fall without any significant sign that inflation would follow.
       This has made Alan Greenspan, a consensus player with no pretense of great insight into the workings of the economy, look like a genius. And it has obviously helped the president, a supporting player in the drama, look good too.
       Regarding provocateur Stein’s comments on the role of deficits in managing the business cycle: After more than a decade of wrestling with what all but the supply-side fringe considers the serious problem of chronic deficits, fiscal fine-tuning has become a useless tool. Private market responses in the form of changes in long-term interest rates, along with growing political lags in changing policy make fiscal fine-tuning an exercise in frustration.
       But Keynes did not die a natural death. He was killed by the madness of Reaganomics. We now have one less policy tool to cope with multiple policy problems in a bewildering complex global economy. Alan Murray
11:02 a.m.  Tuesday  9/10/96 

       Bill Niskanen raises a couple of interesting points. One has to do with education. Bill Clinton has made it clear that he sees improving the education system as the key to improving the economy’s long-term growth. Like others before him, he wants to be the “education president.” But can a Democrat, so beholden to the teachers’ unions, truly reform education?
       One in 10 delegates on the floor of the United Center in Chicago last month belonged to the National Education Association. They weren’t hard to pick out–most sported large lapel buttons AND large signs. Their influence on public policy extends far beyond the controversial question of school choice. Despite Clinton’s kind words about teachers, and everyone’s fond memories of some favorite teacher in their past, there’s no question that the interests of the teachers unions and the interests of students and parents are not the same. To truly change the nation’s education system, Mr. Clinton will have to be willing to part ways with the NEA in his second term.
       Mr. Niskanen also points out that Bill Clinton has opposed cuts in wasteful federal spending. He’s right, but it would be a mistake to leave the impression that Bob Dole is significantly different. Republicans have been most willing to cut the very programs that, arguably, could do the most for the economy–the ones Mr. Clinton likes to tag “investments.” They’ve been far less willing to take on the giant entitlement programs, that feed consumption, not savings or investment. In the past week, he’s actually proposed EXPANDING what may be one of the most wasteful and inefficient of all the entitlement programs–veterans’ benefits. We owe a lot to our veterans; but we owe it to ourselves to pay that debt in the most efficient and least costly manner. Alan Blinder
2:20 p.m.  Tuesday  9/10/96 

       While Murray and Niskanen raise serious long-term questions, I’ll follow our leader’s instructions and stick to cyclical matters today.
       Like Stein, I was baffled by why Niskanen would want us to compare 1982-1989 (a trough-to-peak recovery) with, say, 1990-1995 (which is roughly peak-to-peak). To answer Herb’s question, it is BOTH possible and necessary to distinguish cyclical recoveries from trend growth. The latter depends on labor force growth and productivity growth, which do vary over time, so the quickest shortcut way to appraise a recovery is not by its average GDP growth rate, but by the drop in unemployment. I’m not sufficiently high tech to put a graph into this e-mail; but a plot of the unemployment rate since January 1993 looks pretty good.
       As Passell agrees with me, so do I agree with him–save for one detail. I don’t think we yet know that the fall in the NAIRU has been “very substantial.” My own estimate in 1992 was 5.5 percent to 6 percent; If it’s now below 5.5 percent, the change is not that big. (And, of course, we don’t really know these numbers that precisely.)
       Regarding Stein’s final question, I meant to suggest yesterday that lower government spending or higher taxes do indeed reduce spending–unless there is a sharp, quick bond-market rally to compensate. This happened in 1993. I wouldn’t bet that it is now a law of nature. Niskanen claims that we “flacks” are wrong to credit the 1993 bond-market rally to the Clinton budget plan because rates are now higher than in August 1993. That is about as non a sequitur as I have ever heard. Have we forgotten already that, starting in February 1994, the Fed doubled short-term interest rates and Wall Street panicked that growth would get out of control? Herb Stein
5 p.m.  Tuesday  9/10/96 

       Now that we have Niskanen’s Tuesday communiqué we are all back on the same track, or on the same two tracks. One is the short-run cyclical track, where performance is measured in the unemployment rate and the inflation rate, and the other is the long-term growth track, where performance is measured in total output, productivity, real incomes and the distribution of income.
       As for the first track, there seems to be agreement, with varying degrees of enthusiasm, that the present situation is pretty good. There is some, but not a terrible amount, of disagreement about who deserves the credit for that. Everyone agrees that Alan Greenspan, Chairman of the Federal Reserve, had a lot to do with it. Blinder gives the Clinton administration’s deficit reduction a lot of credit for enabling the Federal Reserve to follow a policy that led to low interest rates and economic recovery. Blinder does not maintain that deficit reduction is a universal prescription for economic expansion, but he argues that in the right amount and in the right time it is the right prescription, and that Clinton found the right amount and the right time.
       (I am a little surprised at Passell describing Greenspan as ” a consensus player with no pretense of great insight into the workings of the economy.” That is like saying that Babe Ruth had little pretense of insight into baseball, as compared, for example, with George Will. Babe Ruth only knew that when the ball came over the plate you should hit it out of the park.)
       Let us now move on to the second, long-run track. If panelists feel that they have more evidence to present about the short-run track they will have an opportunity to do so before we wind up. I suppose everyone agrees that performance on the long-run track has been markedly worse since 1973 than it was from the end of World War II until 1973. One question that has to be asked is whether there has been a further deterioration in the last few years, specifically during the Clinton years. The available statistics suggest that there has been, but the period is short for making a judgment about a change in the long-term trend. There are some who claim to see in the most recent figures, for 1996, an improvement in the growth of productivity. If there has been no improvement, and possibly a deterioration, how do we explain the disappointingly slow growth of output, productivity, and incomes per worker? What have governments done, or failed to do, that accounts for the record? Niskanen has supplied his explanations. I would like to hear the other panelists on that subject.
       Murray has raised the important issue of the apparent growth of income inequality. I would like to get to that before we finish. William Niskanen
5:43 p.m.  Tuesday  9/10/96 

       Due to the miracles of modern technology, my first two submissions (both of which were written last Friday) were reversed.
       We all seem to agree that the current cyclical conditions are marvelous, and Clinton deserves credit primarily for staying out of Greenspan’s way. The disagreement bears on the effect, if any, of the 1993 budget deal. Blinder explains the 1993 bond-market rally (about which I said nothing) in terms of the expected effect of the budget deal, but he fails to explain why interest rates have been negatively correlated with the actual deficit since that time. The primary effect of the budget deal, I contend, was to slow the recovery by increasing marginal tax rates.
       Several of you have objected to comparing growth rates by policy regime because of the different cyclical conditions at the start of each regime. O.K. Then compare growth rates between cyclical peaks, even if it mixes the effects of different policies.
* per adult, ages 20-64

       Again, the Bush-Clinton era does not look very good by comparison.
       NAIRU has been declining by about 0.1 percentage points a year since 1977 and is now about 5.6 percent.
       Fiscal fine tuning has never been a useful tool, a consequence of both political and economic lags. There was no Keynesian Eden even before the supply-side snake.