The New York Times reported last week that former President Bill Clinton is working on a new book on economic policy to be released in time for next year's election. This is unfortunate, since Clinton stands alongside Alan Greenspan as one of the last people who should be giving the country and the world advice on economic policy.
Many people look back with fondness on Clinton years and there is good cause. The economy grew at an annual rate of almost 4.5 percent during his second term. The unemployment rate fell to a 4.0 percent as a year-round average in 2000. And the country saw strong real wage growth up and down the income ladder for the first time since the early '70s.
This was all good news. However, it was unsustainable and Clinton's economic team should have known it at the time. The immediate cause of the prosperity was the demand created by a $10 trillion stock bubble. While this gave some boost to investment, its main impact was on consumption. People spent based on their newly created stock wealth, causing the saving rate to fall below 2.0 percent, which at the time was the lowest level of the post-war era.
Of course bubbles burst, and when this one did, it gave the country a severe downturn in 2001. While the official recession was short and relatively mild, ending in just seven months, the economy didn't start to generate jobs again until September of 2003.
It is not easy to recover from a recession caused by a collapsed asset bubble, as is becoming more evident every day. The country did not regain the jobs lost in the 2001 downturn until 2005, and even then it was only due to growth driven by the housing bubble.
One of the factors that made it harder to recover from the 2001 downturn was the sharp increase in the country's trade deficit. Demand was diverted abroad from domestically produced goods and services. This was, in turn, a direct result of the high-dollar policy that was put in place by Robert Rubin when he became Treasury secretary.
Rubin put muscle behind his high-dollar policy when he oversaw the International Monetary Fund bailout of East Asia from its financial crisis in 1997. The harsh conditions led the countries of the region to sharply devalue their currency against the dollar in order to accumulate enormous reserves of foreign exchange. Other developing countries also followed this path in order to avoid ever being put in the same spot as the East Asian countries.
As a result of this policy, the U.S. trade deficit soared, eventually reaching 6 percent of gross domestic product in 2006. This was the fundamental imbalance in the U.S. economy. By definition, a trade deficit of this size requires either large budget deficits or negative private savings. We saw the latter in a big way as housing bubble wealth led to another consumption boom that pushed the household saving rate to near zero from 2004-2006.
Clinton also removed restrictions on the financial industry. This left the door open for AIG and others to run wild with credit default swaps. It also created an environment in which every new financial innovation was seen as a step forward for society.
Clinton also deserves some grief from shoving the TRIPs provisions into the Uruguay round of the World Trade Organization. The TRIPs provisions, which are largely the invention of the U.S. pharmaceutical industry, are rules that require countries to have stronger patent and copyright protections. They are likely to lead to sharply higher drug prices in the developing world. One of the main goals of President Clinton's foundation is to try to make essential medicines affordable for people in the developing world. The TRIPs provisions are one of the reasons that these medicines became unaffordable.
Thankfully, Clinton probably will have the sense not to lecture us on the virtues of TRIPs or his removal of restrictions on the financial industry. More likely, he will be preaching the virtues of balanced budgets. This is the part of the legacy that the country must have the courage to reject.
Balanced budgets are 180 degrees the wrong answer in today's economy. We desperately need government deficits in order to make up the lost demand from the private sector. For the near-term future, the private sector is not going to spend enough to bring the economy back to full employment.
But balanced budgets were also the wrong answer in the Clinton years. Clinton's spending cuts and tax increases helped get the deficit down in his first term, but the main reason that the deficit continued to shrink and turn to a surplus was the growth driven by the stock bubble. The Congressional Budget Office's projections showed that even with the Clinton administration's tax increase and spending cuts, we still would have been looking at a substantial deficit in 2000 had it not been for the stock bubble.
In short, President Clinton did not balance the budget; the stock bubble balanced the budget. There is no doubt that excessive deficits can harm the economy, but we are not looking at such a situation now or any time in the near future. Over the longer term, we are projected to run large deficits, but this is entirely because our health care system is broken. If our health care system was as efficient as that of any other wealthy country, we would be looking at surpluses, not deficits.
Please, President Clinton, save some trees. Don't give a half-baked lecture on the virtues of deficit reduction. It is not what the country needs.
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