Monday, October 8, 2012

Clinton's Economy: Myths and Realities.

During the 2000 Presidential campaign Al Gore, trying to define himself as his 'own man', distanced from Bill Clinton and rarely invited Clinton to the campaign trail. Time columnist Lance Morrow wrote, "while Salieri campaigns, the Mozart sits in the Oval office". Obama after sparring with both Clintons in 2008 vowing a new era and basking in his own new found rock star status had no need of the fabled campaigner. What a difference 4 years makes. 

In 2012 the Mozart was called out by this year's Salieri to campaign. Clinton, the party soldier, appeared on prime time at the Democratic National Convention and showed the world why he still is the only Mozart in town. A day after accepting the nomination Obama gushed, at a campaign stop, "I got an email suggesting that I appoint Bill Clinton as the Secretary of 'explaining stuff'". The crowd roared in approval seeing the supposedly silver tongued orator realize that giving a speech littered with pabulums and rhetoric is no match for the master-explainer.

Bill Clinton laid out the case for Obama often reminding America about the sunny years of the Clinton era. Like any politician Clinton took credit for the years that are still referred to as the longest economic expansion in US history. If somebody can make the word 'arithmetic' become a punch-line only Clinton could. Clinton detailed his years of balancing the budget, working across the aisle, delivering prosperity, surplus budgets and more. 

Amidst campaign rhetoric as always truth is the first casualty. Clinton roared into office on a landslide coasting on the mantra "its the economy, stupid". Unemployment was at 7.5% in 1992 (today it is 7.8% and Clinton wants a second term to the guy at the helm unlike what he said in 1992!!!). When Clinton left office unemployment was at 4.7%, up 0.7% during the same year, 2000, as the nation was sliding into recession. Clinton often boasts about the 20 million jobs created in his tenure and the budget surplus that he left. Both are true, but only on the surface.

Economist Raghuram Rajan taught me, in his book 'Fault Lines' on the 2008 financial crises, an important principle about any analysis of an event. He said it is important to look at not just the event but its associated events. He said look for 'in ceteris paribus", i.e. 'all things remaining same'. Clinton made it a virtue that he raised taxes on the so called wealthy that helped address deficit and the rest followed. Can Obama do the same 'in ceteris paribus'?

Clinton's 1992 budget deal, recounted in detail by Bob Woodward in 'Agenda', is remarkable for how much the debate remains the same. Clinton's address of Feb 17th 1992 is classic Obama. But the similarity is only on the rhetoric. By the time the address was turned into a bill and voted Clinton had moved to the center. Clinton abandoned the middle class tax cut he campaigned on. The price he extracted for that was taxing the rich. The movement to the center abandoned spending the revenue raised by that tax on pet liberal causes. This is where Obama fails. Obama can never be Bill Clinton. Woodward acknowledges that Clinton's tax helped address the deficit.

But is that all? No. Look at the world in 1992. USSR had imploded. Eastern Europe was redrawn. Germany, Europe's powerhouse of production, was spending billions of dollars in the unification and was also dealing with the political turmoil arising out of that. India and China were not yet BRIC. India, in 1991, had been compelled to reform its pathetic economy due to a balance of payment crises. It took Deng Xio Ping well into 90's to reform China's economy. Add to the above the 1997 Asian crises that America managed to dodge making Alan Greenspan, Robert Rubin, Lawrence Summers as 'Person's of the year" by Time. 

Into that picture try to fit in the internet revolution. Today there is a hue and cry over raising taxes on dividend income. Time, in it's cover story of 1982 titled 'America's risk takers' with Steve Jobs on the cover.
The TIME cover story is telling in details:

                 In 1969 Congress increased from 25% to 49% :he maximum tax on long-term capital gains—the profit made by an investor on the sale of stocks, real estate and other property.
The effect was devastating. The amount of money that Americans were willing to gamble on a long-shot business dropped sharply. In 1969, $171 million was amassed in venture capital. By 1975 the amount had fallen to just $10 million.
                In 1978, however, Congress rolled back the capital gains tax rate to 28%. With the potential payoff increased, investors were again willing to take a risk. Last year $1.3 billion in venture funds was accumulated, more than 100 times the amount of only six years earlier.
Add on the Y2K economy. America was importing talent by allowing H1B's by the thousands and unemployment was still going down. At its lowest, unemployment would be 4%. A full 1% below what is considered full employment. Talk about an over heated economy.

The Dow was soaring with everyone asking 'how high is high'. The one really great achievement by Clinton in this period was signing NAFTA. Much of the work for NAFTA was done by the previous Bush administration. Clinton enlisted Bush to campaign for NAFTA with Congress. Obama rattled Canada by vowing to re-negotiate NAFTA and scolded both Clintons on the campaign trail for NAFTA. Again, Obama is no Bill Clinton. Yes, Obama has signed a free trade pact with Mexico and South Korea but the work for that was done by George W Bush administration.

Into this heady cocktail lets add the surging housing market. Alan Greenspan battling unemployment early on kept interest rates too low for too long. The housing market just exploded beyond belief. Clinton and subsequently Bush campaigned for the 'American dream'. Clinton ignored calls to rein in Fannie and Freddie. Bush Jr's attempt to rein them in was rebuffed by a Democratic congress. Many economists later would point to the low interest regime during Greenspan era as sowing the seeds for a crises that brought American economy to its knees. 

Clinton took credit for an economy that was starting to get better even during the days of George H.W.Bush. Of course Clinton did make some hard choices like the tax bill he passed. However Clinton's signature achievement, 'ending welfare as we know it' was largely the result of a republican congress.

Bush Jr inherited a recession that was entirely due to Clinton era policies. The dot com bust was due to what Alan Greenspan memorably labeled 'irrational exuberance'. Bush, unlike Obama, did not blame his predecessor at every speech. 

Liberals love to talk about de-regulation as the sinister evil that created the 2008 financial crises. Most point to the repeal of Glass-Steagall act that separated investment banks from commercial banks. It was Bill Clinton who signed that repeal. (Never mind that Bear Sterns and Lehman bankruptcies had nothing to do with that repeal). It was Clinton's economic tag team of Larry Summers and Robert Rubin that warned off Brooksley Born who wanted to regulate the burgeoning derivatives market. The implosion of the derivatives market would be at the center of the financial crises a decade later. 

Oh, about that working across the aisle. Clinton's economic plan in 1992 recieved zero republican votes. The GOP's intransigence was only part of the story. Woodward recounts that Democratic legislators were warned 'not to work' with GOP to craft any compromise. And who would forget the infamous Newt Gingrich led government shutdown. Clinton made it habit to co-opt GOP ideas and do what came to be called 'Clinton's triangulation'. Obama derided that triangulation in 2008 proving that he can never be Bill Clinton. 

Clinton, to sum, takes too much credit for unique circumstances where US was the unassailed economic super power by a mile. At the same time Clinton and his admirers turn a complete blind eye to the fact that it was Clinton's administration that has much to answer for the financial crises. 

America and the world in 2012 are only faintly similar to 1992. The Euro area is collapsing, China and India are having challenges. It may not be 1992, but if only Obama was Clinton, at least the good sides, America would roar ahead, again. Alas, that will not be the case.

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