Clintonomics

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The term Clintonomics, a portmanteau of Clinton and economics, was used to describe the economic policies of U.S. President Bill Clinton during the 1990s. Clinton assumed office at the tail end of a recession, and the economic theories he utilized and implemented are claimed by his supporters to have eventually led to a strong recovery, though Clinton's opponents deny this.

The strategy was outlined in the following three points:

  • Establishing fiscal discipline, eliminating the budget deficit, keeping interest rates low, and spurring private-sector investment.
  • Investing in people through education, training, science, and research.
  • Opening foreign markets so American workers can compete abroad.

Contents

[edit] Historical Background

During the 1992 presidential campaign America had undergone twelve years of conservative policies implemented by Ronald Reagan and George Herbert Walker Bush. Clinton ran on the economic platform of a balancing the budget, lowering inflation, lowering unemployment, and continuing the traditionally conservative policies of free trade. In 1992 Bill Clinton was elected president of the United States of America. During Clinton’s presidency (1993 to 2001), the economic policies he put into place for the U.S. were termed Clintonomics. Five years earlier, before Bill Clinton began his presidency, the stock market dropped significantly. This day was named “Black Monday.” Clinton inherited Alan Greenspan as Chairman of the board of Governors.

[edit] Monetary Policy

The Monetary policy of the United States is not directly created by the President or his Council of Economic advisers. It is created by an autonomously run government division the Federal Reserve Board of Governors or better known as the “Fed”. The Fed and the central bank have the power to control the money supply AKA “high powered money” (A New Democrat) of the United States. The Fed controls the major open market operations of which the Federal Reserve Rate is the most prominent because it is the interest rate between banks. This in turn has a positive correlation with the interest rate of banks to their customers. A President can however effect change within the Federal Reserve’s Policies in a number of ways. Two major factors can determine how a President tries to influence the Fed.

The first and most direct way is by appointing the Fed’s board of governors. Clinton had the celebrated economist Alan Greenspan as the Chair of the Fed’s board of governors throughout his presidency; he also appointed two widely considered “moderate advocates of tight money, Alice Rivlin and Laurence H. Meyer.” (A New Democrat, 399) Other appointments to the central bank perpetuated this trend of moderates in other nominations.

The effects of this policy of appointing tight money proponents to the Fed are depicted in the Bureau of Labor statistics figure 1 depicting the consumer price index change or Inflationary rate which determines the amount of money on the market (See Figure 1).

The higher the CPI the more money there is on the Market. This in turn slightly devalues the dollar when compared to the other currencies. Which makes exports less expensive abroad and therefore more demanded. Economic monetary thought states that you want some inflation but not too much. According to the graph the CPI stabilized during the 1990s at a fairly low rate never going above 5 percent during the Clinton presidency. Which some would say is the result of the Presidents appointment of tight money proponents onto the Fed’s board. This strategy may have greatly contributed to the stabilization and lowering of the rate of change in CPI or the rate of inflation. Which lead to a huge growth in the “Dow Jones industrial from 3255.99 in January 1993 to 11500 in early 2000”( A New Democrat, 399) However it may also have contributed to the expanding of our trade deficit (Exports – Imports) as shown by the graph of percentage change in Economic growth (red line) to Trade Balance (blue line) (See Figure 2).

As you can see from 1996 to 2000 a steady growth of the trade deficit from -100 Billion dollars to an all time low at the time of nearly -400 billion in 2000.

The second such factor is the way in which a President may appeal to the Fed to either tighten or loosen the money. This is a non-binding request by the president and his Council of Economic advisers which means that the Fed has no obligation to oblige this request. However it does put some pressure on the Fed to take action in times of economic hardship or prosperity. In times of economic hardship the President would suggest that the Fed lower the Federal Funds Rate which would be a way to increase investment in the economy and would also make credit more available to the people and which would in turn spend that money into the economy which would be circulated through the economy, it’s overall effect would can be calculated using the Multiplier effect. In times of prosperity the Federal Funds Rate may be raised to slow the economy down and prevent a credit bubble in which the economy is being fueled by borrowed money which was the reason for the Great Stock Market Crash. This would raise the interest rates making the potential borrower be more conservative and encourages people to save more than spend which is a way to strengthen economic growth. A second tool the Fed has is to raise and lower the discount rate the discount rate is the interest attached to loans given to localized banks from the central or Federal Reserve banks. If the discount rate is lowered the money supply or “high-powered money”(A New Democrat) is increased because the localized banks are encouraged to borrow from the Federal Reserve Banks which keeps money that is not currently in the money supply thus adding to the money supply. A higher discount rate will have the opposite effect encouraging banks to borrow excess money to the Federal Reserve in the form of buying bonds.

President Clinton was relatively hands off in this department only asking to tighten or loosen money three times each in eight years in the White House (A New Democrat) a possible explanation for this is that the Fed had the same sort of ideas that the president’s council of economic advisers believed in, therefore there was not very much discord. Evidence for this is the fact that most of his requests were made during the beginning of his presidency (A New Democrat) presumably before he got his appointments onto the Board.

[edit] Regulatory Policy

Regulatory Policy is the amount of regulation put on the economy by the laws put into effect by the Congress, which means that Regulatory process are mostly determined by the Congress. However, the veto power of the President gives him limited control over the amount of regulation, but he cannot single handedly regulate the economy. His only significant attempts at regulatory legislation were campaign finance and a very liberal health care proposal, which were shot down in 1993 and 1994 respectively. The only laws that could be considered Deregulation according to John Burns and Andrew Taylor’s article A New Democrat are The Telecom Reform Act of 2/8/1996, which dispatched the ownership restrictions on radio and television, “agriculture and the pesticides legislation of 1996 and the Food and Drug Administration overhaul of 1997.” (400) which were all signed into law by President Clinton. According to the same article the considerable regulation passed by the congress consisted of The Family and Medical Leave Act of 2/5/1993, which made paternity, maternity and medical leave available, The Minimum wage Increase Act of 8/20/1996 which raised the minimum wage and let states set it even higher if they wished. Also passed during his tenure the “California desert protection, direct lending of educational financial aid, health insurance portability, and safe drinking water legislation.”(400) Clinton was a clear departure from the previous two administrations of Reagan and Bush where there was almost no deregulation laws introduced into law.

How did this affect the economy? The economy is typically affected negatively by regulation because by definition regulation forces an adjustment in business practices. Like polluting less which would increase the cost of operation for a firm because they have to dispose of a pollutant or establishing a price ceiling which will interfere with market equilibrium (the price at which demand for a product and supply of a product are equal). An example of this is the minimum wage hike which is for all purposes a price floor for labor this increased the amount of money unskilled labor such as construction, assembly, and food service. This wage increased quality of life for these laborers and allowing the workers more money to infuse into the economy for consumer products. However it had some adverse effects as well. This made it harder for small business to employ workers because they have to pay higher wages leading to fewer jobs. It also made it less beneficial for big firms to establish manufacturing or assembly plants in the United States when they could manufacture the products in other countries much cheaper and then import them to the United States. This in turn increased the trade deficit. The regulations usually serve a more humanitarian purpose helping a victimized part of the work force, prevent price gouging, or protecting the environment.

[edit] Fiscal Policy

Fiscal policies involve taxing, spending, and Federal Budget. Taxes levy the government to create revenue needed. This gives the government income for social programs. Clinton signed into law a tax named “Omnibus Budget Reconciliation Act of 1993.” This act created a 36 percent to 39.6 income tax for individuals. Businesses were given an income tax rate of 35%. The cap was repealed on Medicare. The taxes were raised 4.3 cents per gallon on transportation fuels. the taxable portion of Social Security benefits were increased. The “Taxpayer Relief Act of 1997” reduced some of the federal taxes in America. Due to certain phase-in rules, the rate 28% was lowered to 20% in the top capital gains. The bracket that was 15% fell to 10%. In 1980, a tax credit was put into place stating each individual under the age of 17 would be in affect of this. In 1998, it was $400 per child. In 1999, it was raised to $500. High income families had this act phased out. This act took out from taxation profits on the sale of a house of up to $500,000 for individuals who are married, and $250,000 for single individuals. Educational savings and retirement funds were given tax relief. Some of the expiring tax provisions were extended for selected businesses. Since 1998, an exemption could be taken out for those family farms and small businesses that qualified for it. In 1999, the correction of inflation on the $10,000 annual gift tax exclusion was accomplished. By the year 2006, the $600,000 estate tax exemption had risen to $1 million dollars.

There are three main types of discretionary spending: government consumption, government investment, and transfer payments. Government Consumption is when goods and services are bought by the government. Government investment is when the government buys goods and services in the purpose of ensuring a good infrastructure is in place for present and future citizens. Transfer payments are when goods and services are not purchased by the government, and instead are just sums of money that are being transferred. An example of transfer payments are social security payments. In other spending the Government has spent $100 million on counter terrorism. One last spending act that was put into place was the “Personal Responsibility and Work Opportunity Reconciliation Act of 1996.” This law had a “fundamental shift in both methods and goal of the federal cash assistance to the poor.” Temporary Assistance for Needy Families (TANF)(effective as of 07/01/97), Aid to Families with Dependent Children (AFDC), the Job Opportunities and Basic Skills Training (JOBS) program were among the organizations of this act. The spending was $22.6 billion, in 1995. This bill was followed with reduction of unemployment. The federal budget is the combination of both the U.S. taxes and Spending. During Clinton’s presidency, these acts had brought the economy out of its deficit and into a surplus (See Figure 4).

This has affected the economy in that the balanced budget and even more the surplus increased investor confidence in the economy, leading to an increased amount of investment. This is especially in the stock market. This change is exemplified by the dramatic increase in the Dow Jones industrial index (See Figure 3).

[edit] Macroeconomic Policies

Bill Clinton’s macroeconomic policies of his presidency can best be looked at through three main categories: gross domestic product (GDP), inflation rates, and unemployment rates. The first factor we will examine will be the GDP.

As Bruce Bartlett points out in his article Those Were the Days, Bill Clinton inherited from his predecessor, George H. W. Bush, a deficit of 4.7% of GDP. Although the deficit was not a large priority in Clinton’s initial macroeconomic policy, he made its reduction a higher priority later in his term (Burns and Taylor 393). Among many parts of Clinton’s policy to lower the deficit, he allowed for the passing of laws that raised the money in the US Treasury (Burns and Taylor 395). Clinton also, as Bruce Bartlett pointed out in the same article, cut federal spending and also raised taxes of the rich to lower the deficit.

The pursuit of low inflation rates was another large aspect to Bill Clinton’s macroeconomic policies. He, unlike most other post-war democrats, worked to keep the inflation rates low, and succeeded (Burns and Taylor 389). The mean inflation rates of Bill Clinton were at 2.3%, which are low when considering the fact that that is about half of the rates of Republican Presidents (Burns and Taylor 389).

Lower unemployment rates were another large part of Clinton’s macroeconomic policies. Many argue that Clinton cost many Americans jobs because he supported free trade, which some argue caused us to loose jobs to countries like China (Burns and Taylor 390). Even if Clinton did cost Americans some jobs because of free trade support, he allowed for more jobs than were lost because the unemployment rate of his presidenct, and especially his second term, were the lowest they had been in thirty years (Burns and Taylor 390).

[edit] Macroeconomic Effects

Like the macroeconomic policies section of this page, the easiest way to look at the macroeconomic effects of Clinton’s presidency is two look at three main points: gross domestic product (GDP), inflation rates, and unemployment rates.

As Bruce Bartlett tells us in his article Those Were the Days, Clinton took our countries deficit of 4.7% of GDP in 1992 and turned it into a surplus of 2.4% of GDP in 2000. Bruce Bartlett continues to say that some of the means to lower the deficit had their own effects on the economy. Bartlett tells us that “Federal spending fell to 18.4 percent of G.D.P. in 2000 from 22.2 percent in 1992. Bartlett also explains that “although Clinton raised taxes in 1993, he cut them in 1997”.

Clinton also lowered inflation rates. During his presidency Bill Clinton was able to lower the inflation rates down to 2.3%. Average democratic presidents had an average of about double that rate, and republicans had even higher rates (Burns and Taylor 389). This lowering of interest rates contributed greatly to the good economic health exhibited during Clinton’s presidency.

The final category we will examine is the low unemployment rates of Bill Clinton’s presidency. The average unemployment rate of democratic presidents, excluding Clinton, is currently about 4.3% while the average unemployment rate for republican presidents is currently at about 6.1% (Burns and Taylor 390). Bill Clinton’s policy achieved a thirty year low in April 2000 with an unemployment rate of 3.9% (Burns and Taylor 390). A comparison of all post world war II president’s unemployment rates during their presidencies can be observed in Figure 2. By observing the figure it can be determined that Clinton lowered the US unemployment rates significantly throughout his entire presidency, and lowered it much more than other presidents did (Burns and Taylor 391). This low rate reflects the healthy economy of Clinton’s Presidency because, as most economists agree, unemployment rates tend to be low in times of economic growth periods. We can see through a simple correlation that Bill Clinton’s economic policies promoted a healthy economy and, as a result, had lower unemployment rates (See Figure 5).

[edit] Criticisms of Clintonomics

Although Clinton did a lot to improve the US economy, his presidency was not left without criticism. A major criticism, as Bruce Bartlett points out in his article Clinton Economics, is that Clinton should have done more to better the US Social Security Program. As Bruce Bartlett tells us, Clinton was able to achieve a budget surplus during his presidency, but “…he chose to sit on [the surplus] rather than use [it] to fundamentally restructure Social Security”. Bartlett continues by saying that by restructuring Social Security, Clinton would have both benefited the nation as well as his party. He would benefit his party by using up money that the Republicans would use for drastic tax cuts, something the democrats would not completely agree with.

The BBC internet article entitled Bill Clinton’s Economic Policy also supports the criticism made by Bartlett. The BBC points out that although Clinton helped US Social Security in the short run by putting away some government money for it, he did very little for the program in the long run. The BBC tells us that Clinton failed to make significant changes to the Social Security Program and because of that, the changes will all be left up to George Bush, the president after Clinton.

Another criticism shared by most economists was that Bill Clinton, by creating NAFTA (North American Free Trade Association), made it cheaper for manufacturing companies to outsource their jobs to different countries, especially Mexico, then export their product back to the United States. This policy, combined with the increase in minimum wage, caused a significant decrease in the amount of unskilled jobs in the United States. This trend continues even today in other sectors of the economy.

[edit] Works Cited

Midgley, James. "The United States: Welfare, Work, and Development." International Journal of Social Welfare 10:7 (2000): 284-293. See Investopedia, "Calculating the Dow Jones Industrial Average" http://www.investopedia.com/articles/02/082702.asp

  • “Bill Clinton’s Economic Legacy.” BBC. 15 January 2001. British Broadcast Corporation. 8 March 2008.

<http://news.bbc.co.uk/2/hi/business/1110165.stm>.

  • Burns, John W. and Andrew J. Taylor. "A New Democrat? The Economic Performance of the Clinton Presidency." The Independant Reveiw V.3 (2001): 387-408.

[edit] Figure Gallery (Click to Enlarge)

Figure 1


[edit] External links

[edit] See also

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