The Obama Economic Team: Clinton Retreads?
Those following the meeting of President Obama's economic advisory committee could not have been very reassured by the presence of Robert Rubin and Larry Summers, both former Treasury secretaries in the
It is important to separate Clinton-era mythology from the real economic record. In the mythology,
At the end of the administration, there was a huge surplus and we were setting target dates for paying off the national debt. The moral of the myth is that all good things came from deficit reduction.
The reality was quite different. There was nothing resembling an investment boom until the dot.com bubble at the end of the decade funneled vast sums of capital into crazy Internet schemes. There was a surge in productivity growth beginning in 1995, but this preceded any substantial upturn in investment.
Rather than investment driving growth during the
The other key part of the story is the high dollar policy initiated by Rubin when he took over as Treasury secretary. In the first years of the
A lowered value dollar will reduce the trade deficit, by making
The high dollar of the late 90s reversed this logic. The dollar was pushed upward by a combination of Treasury cheerleading, worldwide financial instability beginning with the East Asian financial crisis, and the "irrational exuberance" propelling the stock bubble, which also infected foreign investors.
In the short-run, the over-valued dollar led to cheap imports and lower inflation. It incidentally all also led to the loss of millions of manufacturing jobs, putting downward pressure on the wages of non-college educated workers.
Like the stock bubble, the high dollar is also unsustainable as a long-term policy. It led to a large and growing trade deficit. This deficit eventually forced a decline in the value of the dollar, although the process has been temporarily reversed by the current financial crisis.
Rather than handing President Bush a booming economy, President Clinton handed over an economy that was propelled by an unsustainable stock bubble and distorted by a hugely over-valued dollar.
The 2001 recession was relatively short, but the economy continued to shed jobs for almost two years after the recession ended. Because President Bush refused to abandon the high dollar policy, the only tool available to boost the economy was the housing bubble. In addition to the growth created directly by the housing sector, the wealth created by this bubble led to an even sharper decline in saving than the stock bubble.
Of course, the housing bubble is now in the process of deflating. The resulting tidal wave of bad debt has created the greatest financial crisis since World War II. With the loss of $8 trillion in housing wealth, consumption has seized up, throwing the economy into a severe recession.
While the Bush administration must take responsibility for the current crisis (they have been in power the last 8 years), the stage was set during the
For this reason, it is very discouraging to see top