Respond to this Article June 2000

Greenspan? Gipper? Gates?

Republicans can't bear to give Clinton credit for the economic boom. But they should.

By Nicholas Thompson

In the eighth inning of the first game of the 1954 World Series, the New York Giants brought in Don Liddle to pitch to Cleveland Indians' slugger Vic Wertz. Liddle's pitch was down the center of the plate and Wertz crushed it. The ball rocketed 425 feet to deep center field where Willie Mays dashed back, glanced over his shoulder, stretched out his arms, and made a dazzling catch often considered to be the greatest in baseball history. According to legend, Liddle returned to the dugout and said to a teammate, "Well, I got my man out."

To his opponents, Bill Clinton is Don Liddle. The economy is booming on his watch, but only because of the work of others. Larry Lindsay, George Bush's chief economic adviser, suggests that Ronald Reagan is the real Willie Mays. Conservative pundit Robert Novak thanks entrepreneurs and says that giving credit for the boom to Clinton is like ascribing "the Johnstown flood" to "a leaky toilet in Altoona." Senate Majority Leader Trent Lott joked recently that "Some people say 'Well Bill and Al deserve the credit.' I agree. Bill Gates and Alan Greenspan."

Of course Republicans are going to try to pry all the credit away from Clinton before the elections. They can't run against unemployment (it's down), productivity (it's up), inflation (it's barely rising), or the budget deficit (we've got surpluses). Most of all, as the President says, "They can't run against the longest economic expansion in history." Almost by necessity, they have to run on the grounds that Clinton, and consequently Gore, has merely been a fortunate bystander. If they can make that stick, George W. Bush may be able to neutralize the Democrats' strongest argument; if they can't, Gore has a much clearer line to victory. And, unfortunately for Republican partisans, they've got a tough case to make.

Agendas

Presidents don't run the economy in a real sense. They don't write business plans and they don't pour concrete. They rarely inspire workers to get out of bed in the morning, and they don't even directly set interest rates. According to Bob Woodward of The Washington Post, when Clinton began to lay out his first economic plan, he said to his advisors: "You mean to tell me that the success of my program and my reelection hinges on the Federal Reserve and a bunch of fucking bond traders?"

To a significant extent, the answer was yes. A president can't will an economy to health, and it is extremely hard for him even to legislate it. But although a president may not have his hands on all of the country's economic levers, he can at least make sure that they are greased and synchronized. He can make sure that the Federal Reserve and the White House are acting in concert. He can't control bond traders, but he can understand the games they play. He can increase consumer confidence; he can help smooth capitalism's sharp edges.

It didn't take long for Clinton to figure all of this out, and it didn't take long for him to develop his economic strategy: Appoint (and listen to) the smartest non-ideological technocrats around, work like hell to keep the Fed and the bond markets happy, avoid disasters, and give your most wild-eyed political opponents enough rope to hang themselves but not enough to mess up the balance you've found. It's not a strategy that brings thunderous applause in campaign speeches, nor is it the public-investment strategy that Clinton laid out in his 1992 campaign treatise, "Putting People First." But combined with Clinton's intelligence and good sense of timing, it's a strategy that has worked during the globalized gyrations and technological boom of the '90s. He may not be Willie Mays, but he's still miles ahead of Don Liddle.

Balance

The most memorable line from Clinton's 1992 campaign was James Carville's: "It's the economy, stupid." The recession of '90-'91 was over, but productivity was low and the budget deficit had become a national burden. As Ross Perot and Clinton supporters relentlessly pointed out, the national debt had grown into the equivalent of a 267-mile-high stack of 1,000 dollar bills. The government hadn't run a surplus since 1969, but most of the debt came from Ronald Reagan's quixotic attempt to end stagflation (he succeeded) and raise revenues (he failed) through a tax-cut-and-spend policy based on decreased top marginal tax rates and increased military expenditures.

Bush in turn was virtually helpless against the charges of fiscal irresponsibility. He had built the debt with Reagan and, swamped by the bailout of the collapsed savings and loans, punted when given an opportunity to tackle the budget problems early in his term when the economy was still growing. It was only in 1990 that he belatedly bit down, raised taxes, and pushed congressional discretionary spending caps: courageous moves that left him to be pummeled for breaking his "read my lips" promise. Bush seemed ill at ease dealing with domestic issues, he did too little too late, and, when the economy began to slow, the debt climbed and confidence in the U.S. economy sank. Interest rates were sky-high and when Iraqi tanks rolled into Kuwait sending oil prices upwards in 1990, Federal Reserve Chairman Alan Greenspan moved too slowly to reduce rates and prevent a recession. Bush's chance for victory plummeted with the economy and its belated "jobless recovery" as his term ended.

The sagging economy gave Clinton an issue to run on, and the newly-elected President began to counter the downward spiral of confidence before he even took office. In December of 1992, one month before his inauguration, Clinton summoned 300 of the nation's top economists to Little Rock and took notes as they batted ideas back and forth and C-SPAN beamed the images to the country. Even his enemies concede that Clinton is smart and he impressed people with his knowledge, ability to learn, and obvious desire to deal with economic issues head-on. Afterwards, The New York Times editorialized that: "Mr. Clinton promised voters that he alone would make the important economic decisions. Judging from this week's performance, he's up to the task."

Soon thereafter, interest rates on long-term bonds dropped. The markets suddenly had confidence in the young president from Arkansas. He was not a stereotypical Democrat who disliked Wall Street and capitalism too much to understand them. Interest rates are essentially the price of money---how much do you have to pay back down the road to get money now?---and depend on supply and demand. When the federal government runs a deficit, it needs to borrow money---leaving other borrowers scrambling for lenders and forcing up interest rates. Conversely, when government runs a surplus, there's more money around for everyone to borrow, interest rates drop, and it's cheaper for families to buy homes and for companies to buy machines.

Markets are influenced by many factors, but rates continued to drop as confidence in Clinton increased. In 1993, Clinton proposed a budget that aimed at fiscal balance through an increase in tax rates on the affluent and a decrease in military spending---Reaganomics turned upside down. Interest rates dropped again. A few months later, as the budget proposal seemed imperiled and the new president appeared to be walking around with two left shoes on, rates drifted upwards. Finally, in August 1993, after a harrowing battle during which Clinton lobbied until hoarse, the president's budget passed the House and Senate by one vote each and interest rates dropped again. The yield on 10-year Treasury debt had gone from nearly 7 percent at the election to 5.25 percent just after the budget passed.

Republicans, of course, weren't pleased. Although they fought for much of the mid-'90s to accelerate efforts to balance the budget, not one Republican voted for the plan. Newt Gingrich told The Atlanta Journal Constitution at the time that the budget's tax increase would "kill jobs and lead to a recession, and the recession will force people off work and onto unemployment and will actually increase the deficit." Sen. Phil Gramm called it "a one-way ticket to a recession" and John Kasich, currently the House budget committee chairman, told the Congressional Record that the budget was "like a snake bite. The venom is going to be injected into the body of this economy, in our judgment, and it's going to spread throughout the body and it's going to begin to kill the jobs that Americans have."

The budget did pass and no venom was injected. The president paid a political price when the increased taxes of the budget bill worked against the Democrats in the Republicans' congressional victory a year later. But Clinton and the economy would soon reap the benefits of increased economic confidence and loose credit. Most importantly, Clinton had also sent a signal to the Federal Reserve that he was fiscally responsible and that the country's economic needs could be on a par with his own political ones.

Dancing with the Fed

The Federal Reserve Board, virtually embodied by Chairman Alan Greenspan since 1987, controls the amount of money moving through the national banking system and hence has even more direct power than the White House over the ebb and flow of interest rates. If the board of the Fed wants to lower rates and ramp up the economy, they put money into the system and decrease the rates at which national banks borrow from each other and the government. If they want to dampen growth, they do the opposite.

Not surprisingly, chairmen of the Federal Reserve and presidents have traditionally worked at cross purposes. The president wants as much economic expansion as possible at all times during his tenure; the Fed wants sustainable growth and cautiously, apolitically, guards against over-stimulation and subsequent inflation. A president, naturally, benefits if every person in the country who wants a job has one. The Fed chairman knows that prices go up when wages go up; and wages tend to go up when job applicants are hard to find. As a result, the president often finds himself pressing down on the economy's accelerator while the Fed chairman's foot grinds down on the brakes. When this happens, as it did at some point for each of Clinton's five predecessors, the economy tends to stall.

Clinton broke this cycle by thinking ahead and accepting some short-term pain. Clinton knew that if he worked to balance the budget and did the things that make bond-traders happy, Greenspan would keep interest rates low; when the president's keeping the party under control, there is no reason for the Fed chairman to take away the punch bowl. Clinton also appointed sophisticated economists, businesspeople, and seasoned Washington insiders to run his economic policy: Lloyd Bentsen, Robert Rubin, Alice Rivlin, Alan Blinder, Laura Tyson, and Leon Panetta, for example. They spoke the same language as Greenspan, understood the bond markets, and were able to map a path to the chairman's heart.

Of course, Clinton wasn't always fully content with the Fed. When the economy began to show signs of inflation in 1994 and 1995, the Fed did in fact move to increase interest rates---putting people out of work and hurting Clinton politically. Privately, according to close aides, Clinton was furious. But he never went public and he never tried to countermand the Fed. He never criticized the Fed chairman and relations between the two remained close, beginning with the president's first State of the Union address when Greenspan was invited to sit between Hillary Clinton and Tipper Gore in the House gallery. Clinton had made a decision to trust Greenspan; he stuck with it, and was repaid. The Fed backed off its rate hikes in 1995 after heated internal debate and avoided strangling the expansion, a common error historically of central banks worldwide. Following those rate hikes, the Fed relaxed rates slightly and then barely touched a thing for the next four years, even as the economy boomed and the unemployment rate slid well below the six percent level that most economists thought would lead to inflation the same way that winter leads to spring.

Working with Newt

The major threat to the balance that Clinton and the Fed had built came in 1994 when the Gingrich revolt swept Republicans into control of Congress. Clinton and the Fed had reached an understanding on restraint, moving slowly, and getting the fundamentals right. Gingrich wanted to wrap his hands around the economy's neck and turn the damn thing upside down.

There were two dangerous potential outcomes when Gingrich took the tiller: that nothing would get done and that Gingrich would do whatever he wanted. Clinton served as a bulwark against both possibilities. He co-opted some of the most sensible Republican ideas (like changing the culture of welfare) and moved them toward the center. He also used his political dexterity to slow down, and usually stop, the Republicans' worst ideas---from adding endless layers of bureaucracy for every environmental rule to pushing tax cuts in an economy in danger of overheating. Tax cuts make sense when an economy is sputtering---they can lead to increased demand and consumption that helps a country recover---and they probably helped the U.S. to an extent in the early '80s. But they don't make sense during a boom. If the Republicans had passed them during the expansion, the Fed would almost certainly have raised interest rates; once again, one foot on the gas and one foot on the brakes.

Clinton's responsible effect on Congress was seen most clearly in 1998 when it became apparent that we were going to have at least several years of budget surpluses---in large part, to their credit, because Republicans had held Clinton's feet to the fire on balancing the budget. As soon as the surpluses appeared, however, Republicans resumed their call for tax cuts. Clinton recognized that the prudent thing would be to save the surpluses and pointedly announced during his State of the Union that we should use surpluses to "save social security first," which, in practice, means keeping the money in the treasury. The Social Security lobby is one of the strongest in the country, the phrase resonated politically, and the Republicans had no choice but to give in. Almost instantly, the wind was taken out of the sails of the tax-cutting ship, no doubt for the overall good of the economy.

But Clinton didn't just manage the Republicans well, he also maneuvered his own party into sound, economically expansionary ideas. In 1993, while Congress was still Democratic, he pushed NAFTA through a reluctant Congress and against the wishes of labor unions, one of his core constituencies. George Bush and Ronald Reagan had started momentum toward free trade but, just as it took a Republican president to normalize relationships with communist China, it may have taken a centrist Democratic president to sell free trade to the American public---and it certainly took a Democratic president to get it through a Democratic Congress. The impact of NAFTA has been less than the ongoing and angry debate over trade might make you believe---trade with Canada and Mexico equals about two and a half percent of U.S. GDP---and there is a serious downside to globalization in worker dislocation and downward pressure on environmental and safety standards. But the race to the bottom hasn't been nearly as dramatic as people feared, and the benefits of increased exports and inflation held in check by reduced prices and steady wages have surely contributed to keeping the economy healthy.

Similarly, Clinton's strategy in dealing with the Democrats has followed a positive pattern: Meet labor unions, and other organizations that challenge the sharp elbows of capitalism, half-way and try to combine economic growth and relatively equitable distribution. When Republicans tried to take away the unions' right to donate to political campaigns, Clinton not surprisingly defended them. But he defied the unions by allowing increased immigration of high-tech workers when our national shortage became clear, and he has been adamant about open trade.

Clinton has followed a parallel path with environmentalists, another core Democratic voting block. He has rejected grand protection and conservation schemes that alienate business, like strengthening the Endangered Species Act. But he has promoted economically based measures like carbon-emissions trading schemes and, internationally, debt-for-nature swaps. On issues of income inequality, Clinton has also avoided sweeping social programs; but he did expand the earned income tax credit in 1993 and won increases in the minimum wage in both 1996 and 2000. Partly as a result---although it took a while, and it would have been better to have taken more substantial steps sooner---the boom is finally spreading wealth fairly evenly through society. The unemployment rate has dropped to historic lows in every racial group and, between 1993 and 1998, annual income increased by 10.3 percent for the poorest 20 percent of Americans compared with 11.7 percent for the richest 20 percent. Those numbers are slightly deceptive since income doesn't take into account stock appreciation; but as a comparison, consider that, between 1981 and 1993, income for the poorest quintile dropped by 4.4 percent while increasing by 26.4 percent for the most affluent.

Birth of the Cool

After balancing the budget, winning the wars with Congress, and setting a sound but innovative economic path, Clinton focused on keeping the engine running and the train on the track. When dangers appeared on the horizon, he dealt with them. When Mexico's currency collapsed under the pressures created by jittery currency traders and free-wheeling investors, Clinton, against political advice, worked to develop an economic bailout package that helped to get our southern neighbor back on its feet. After the Asian economies went into freefall, threatening the world economy, Clinton didn't panic. He made sure that Rubin got on the phone to assure the financial markets and he helped to organize an increase in IMF support. When Russia defaulted on its debt in August of 1998, Clinton tracked down Rubin and the White House kept everyone cool. Greenspan, who had been having breakfasts with Rubin weekly since the latter became treasury secretary, rapidly decreased interest rates three times, goosing the U.S. economy and reassuring world financial markets.

As a result, the United States has avoided calamity and consumer confidence has flourished. And when an economy is structurally sound, confidence is the energy that pulses through the circuits and drives the system. When Clinton came to office, the economic mood was best captured by the title of economist Paul Krugman's book: The Age of Diminished Expectations. In 2000, Clinton's last year, the mood is probably best captured by James Glassman and Kevin Hasset's Dow 36,000. Our stock market has shot up from 3,000 to 10,000 under Clinton's watch and economic optimism is higher than ever before. Consumer spending is well up, as is corporate investment. Everybody in the world wants dollars and the United States has remained an island of stability as other nations' economies have bounced up and down throughout the decade.

There are dangers and it's quite possible that the economy is now heading into a dip. But the overall trends powered by consumer confidence have been overwhelmingly positive. Even our national savings rate, the scourge of economic doomsayers, has actually improved slightly over the past eight years. Personal savings have worrisomely dropped but government savings have dramatically improved and compensated as the budget has moved into balance.

How much credit does Clinton get for this? He surely gets credit for extinguishing the budget deficit: the number one source of economic anxiety during the early 1990s. He also gets credit for the cool confidence he has given off while weathering storm after storm and for pushing policies that have seemed to a majority of Americans, including a majority of businesspeople, to be sensible and sound. He has also set an example: He trimmed the government's size, cut the White House staff by 25 percent, and has been judicious about raising White House salaries. The percentage of people who answer in the affirmative when asked whether they approve of Clinton's economic management now stands at 75 percent. This is a startling peak to which his ratings have been slowly and steadily climbing, with a couple of downturns, since January of 1995 when they first passed 50 percent. It is also an indication of how Clinton's policies have helped spur the confidence fueling so much of the boom.

Credit the Fed

Critics of Clinton counter that Greenspan has actually been pulling the strings. This argument rests first on the core principle that Clinton's impact has been indirect, if it exists at all. Clinton can influence interest rates by fighting Congress to balance the budget and by trying to cajole the bond markets; he can pass sound economic policies, but only after protracted political struggles. If Greenspan's mood sours because he suddenly notices that one crucial economic indicator is off, he can yank up interest rates by fiat.

The naysayers' argument is also based on personality. Although Bill and Alan do have a good working relationship, in many senses Greenspan has built a reputation as the anti-Clinton. Clinton is all exuberance, Greenspan all gravity. Clinton's ideal day would be spent shaking hands; Greenspan's would be spent reading charts in the bathtub. If there's been a steady hand and a knowing prognosticator who has inspired confidence, the argument goes, it must have been Greenspan.

Greenspan's reputation does have its advantages---it's reassuring to think that the near-impenetrable complexity of the entire U.S. economy is overseen by a detached wizard sitting in a castle next to a stack of spreadsheets---and Republicans have tried to build it up as much as possible. Phil Gramm calls him "the greatest central banker in history," and John McCain even said during the campaign that "if Mr. Greenspan should happen to die, God forbid I would prop him up and put a pair of dark sunglasses on him, and keep him as long as we could." Fed chairmen, even when successful, have historically been relatively unknown (how much do you know about William McChesney Martin?), but everyone knows Greenspan. In 1998, Gennifer Flowers echoed the conventional wisdom of Clinton's opponents when she told Larry King that if Clinton were to resign the economy might "have a little bit of problem for a couple of days," but "Alan Greenspan would step in there and make sure that our economy would become healthy right away."

But the argument for Greenspan is not entirely persuasive. Greenspan has had a successful career, but, as you probably wouldn't know from Republican senatorial rhetoric, his long-term track record doesn't quite mirror the Oracle of Delphi's. In 1980, he promoted Ronald Reagan's supply-side tax policies against the charges of voodoo by describing them as "an exercise in reasonable economics." In 1984, he urged government regulators to exempt Charles Keating's savings and loan from regulatory standards because of its skilled management. In 1987, at his first Fed meeting as chairman, he dramatically raised interest rates, contributing significantly to the stock market crash one month later. In 1990, he failed to anticipate the recession until it had already begun. Then, fearing oil-driven inflation after the Iraqi invasion of Kuwait, he refused to decrease rates, letting the recession take root and, ultimately, helping to drive Bush out of office.

Under Clinton, Greenspan's record has also been mixed. He hiked rates in 1994 and 1995 by three percent, in large part because of a fear that we had dropped below the "natural rate of unemployment" of about six percent. The hikes did have a positive effect on the banking sector, but Greenspan later seemed to admit an error when he spun around and decreased rates by 0.75 percent not long thereafter---a sound move considering that unemployment has somehow been able to drop below four percent without triggering inflation. Greenspan has also hiked rates six times since June of 1999. Why? Again mainly because of a fear of future inflation, even though inflation rates are exceptionally low and even though Greenspan admits that our current economic measurements overstate price increases considerably. As further evidence of the improbability of inflation, long-term interest rates are now bouncing around slightly below short-term ones---a fairly unusual occurrence that indicates that bond traders, notorious inflation hawks, see future price increases as decidedly improbable.

Furthermore, although Greenspan is rightly concerned about the impacts of a bursting stock market bubble, he has not taken any of the few relatively simple steps that he could have to let a little air out quickly: for example, raising the restrictions on margin trading (buying stocks with money borrowed from your broker). He instead has tried to burst it indirectly, and ineffectively, through rate hikes, starting as early as 1994 when the Dow was running at about 4,000. According to a recent Wall Street Journal report, after raising interest rates slightly and watching the market slip in February of that year, Greenspan told his Fed colleagues on a conference call: "We partially broke the back of an emerging speculation in equities We had a desirable effect." Six years and six thousand points later, Greenspan is still kicking the market in the shins every few months, but he's not quite having the effect that you might expect a wizard to have.

In addition to his quick reflexes and teamwork with Rubin and Clinton during the international crisis of the last four years, Greenspan does deserve tremendous credit for one thing: not raising interest rates between 1995 and 1999 (with one small exception in 1997), even as inflation hawks on the Fed pressed him to put on the brakes. Greenspan tested economic theory and he challenged conventional wisdom, along with his prior opinions, by letting unemployment slide gradually down. In retrospect, this has been a brilliant decision. Even so, success through inaction in one area shouldn't be enough to elevate a good man and a very competent central banker to divinity.

Going to California

There is a final argument that neither Clinton nor Greenspan matters much. While they've been setting macroeconomic policy in Washington, 3,000 miles away, computer processors have been improving at a rate never seen in any industry before and the Internet has become one of the greatest productivity-boosters in history. When the world is fully wired, management can track exactly where every truck in its company is, the unemployed can find jobs while surfing the Web in their pajamas, and businesses can cut out layers and layers out of their bureaucracy.

Clinton did have a small role in helping further this technological revolution: A market offering easy credit through low interest rates assisted venture capitalists and Silicon Valley startups in their borrowing. Clinton also pushed through tariff reductions on high-technology products well before it was clear how important information technology could be. Greenspan also was one of the first economists to recognize the potentially revolutionary impact of computer technology and that was one reason why he didn't raise rates between '95 and '99. Still, at the most, Clinton and Greenspan helped to set the scene; they didn't etch circuits into silicon with stunning rates of efficiency; they didn't come up with brilliant plans for startups; and, even if they were both slightly ahead of the curve, they didn't completely understand or anticipate the technology revolution until it exploded around them.

But is the technology revolution the elusive Willie Mays that Republicans are so desperately searching for? Doubtful. It has mattered a lot, but it hasn't been everything. For one, only eight percent of the workforce is employed in information technology. As importantly, although there's no question that computers do make companies run more efficiently, there are also serious drawbacks. It takes a while to make the things work, systems become obsolete quickly, and employees often end up wasting time through endless chat groups or game playing---the source of about $100 billion lost annually according to a recent study by SBT Accounting Systems.

A decade ago, Robert Solow, an economics Nobel Laureate, famously said, "You can see the computer age everywhere but in the productivity statistics"---a notion confirmed by economic studies throughout the past decade which have concluded that information technology, no matter how funky and cool, has been slow to improve our efficiency. Productivity rates stayed constant from the beginning of the computer revolution in the early 70s until about 1996, when it finally started to creep up. In the last year and a half, it has started to improve more dramatically, but the improvement is coming too late to support the argument that computers have done anything more than extend the boom. They will surely bring great benefits in the future, and they're doing a lot to keep the economy strong today, but they didn't build or power the economic expansion.

More importantly, computer technology has also been booming in every other industrialized country on earth: in Thailand, in Japan, and in France. All three of these countries have been in recent economic downturns and not one other country has done nearly as well as the United States. Why not? Maybe because of cultural factors, labor market structure, flukes, whatever. But also because, although computers are important, a country's success still depends on political and economic leadership.

And the Winner Is

In short, real people, making real decisions, helped to create the conditions for this economic boom. Paul Volcker stamped out inflation and Ronald Reagan oversaw the demise of the Soviet threat that ultimately allowed Clinton to cut defense expenditures. George Bush started to make the move toward budget balancing and computer entrepreneurs from Linus Torvalds to Bill Gates did create technology that's changing the way we get things done. Alan Greenspan skillfully analyzed the economy and recognized which way the wind was blowing when he took his foot off the brake in 1995 and kept it off until 1999. If the Academy Awards were giving out an award for the economy, Greenspan might win best supporting actor, Gates would win for special effects, and Volcker, Reagan, and Bush could vie for best set design.

Clinton however deserves more. He showed a great sense of timing and a sense of where he was. He's the one who finally learned how to get the White House and the Federal Reserve to work as a team; he balanced the budget; he found a successful middle path between traditionally sparring economic groups and ideas; he ultimately found a balance between high-paced capitalism and a sustainable economic expansion; and he has played a leading role in the consumer confidence that has been so important to the boom. No, Clinton didn't create the economic boom, but he should take home the award for best director.

Research assistance provided by Elisabeth Frater, Igor San Juan, and Sameer Singh

Nicholas Thompson is a contributing editor of The Washington Monthly. You can email him by clicking here or read his other articles by clicking here

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