http://www.guardian.co.uk/commentisfree/cifamerica/2008/nov/10/obama-white-house-useconomy
The high priests of the bubble economy
If Barack Obama really wants things to change, he shouldn't be seeking
economic advice from Clinton-era officials
by Dean Baker
Those following the meeting of Barack 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 Clinton
administration. Along with former Federal Reserve Board chairman Alan
Greenspan, Rubin and Summers compose the high priesthood of the bubble
economy. Their policy of one-sided financial deregulation is responsible
for the current economic catastrophe.
It is important to separate Clinton-era mythology from the real economic
record. In the mythology, Clinton's decision to raise taxes and cut
spending led to an investment boom. This boom led to a surge in
productivity growth. Soaring productivity growth led to the low
unemployment of the late 1990s and wage gains for workers at all points
along the wage distribution.
At the end of the administration, there was a huge surplus, and we set
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
funnelled 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. Clinton had the good fortune to be
sitting in the White House at the point where the economy finally
enjoyed the long-predicted dividend from the information technology
revolution.
Rather than investment driving growth during the Clinton boom, the main
source of demand growth was consumption. Consumption soared during the
Clinton years because the stock market bubble created $10tn of wealth.
Stockholders consumed based on their bubble wealth, pushing the saving
rate to record lows, and the consumption share of GDP to a record high.
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
Clinton administration, the dollar actually fell in value against other
currencies. This is the predicted result of the deficit reduction. Lower
deficits are supposed to lead to lower interest rates, which will in
turn lower the value of the dollar.
A lowered dollar value will reduce the trade deficit, by making US
exports cheaper to foreigners and imports more expensive for people
living in the US. The falling dollar and lower trade deficit is supposed
to be one of the main dividends of deficit reduction. In fact, the lower
dollar and lower trade deficit were often touted by economists as the
primary benefit of deficit reduction until they decided to change their
story to fit the Clinton mythology.
The high dollar of the late 1990s 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-run 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 George Bush a booming economy, 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 the second world war. With the loss of $8tn 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 eight years), the stage was set
during the Clinton years. The Clinton team set the economy on the path
of one-sided financial deregulation and bubble driven growth that
brought us where we are today. (The deregulation was one-sided, because
they did not take away the "too big to fail" security blanket of the
Wall Street big boys.)
For this reason, it was very discouraging to see top Clinton
administration officials standing centre stage at Obama's meeting on the
economy. This is not change, and certainly not policies that we can
believe in.
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