Seems like everywhere we look, we see rising nostalgia for the Clinton Era. Perhaps that’s nowhere more evident than in the sudden burst of popular support for Hillary Clinton, who will step down as Secretary of State within the next few weeks.
A new poll from the Washington Post and ABC News show 57 percent of respondents would favorably view a presidential bid from the former First Lady and Senator. Even a few Republicans have Clinton nostalgia, with 23 percent supportive of a potential Hillary Clinton candidacy, if not for a Clinton victory.
We’re also seeing Clinton nostalgia in a more concrete sense as we barrel towards the fiscal cliff, which both parties set up in two previous rounds of negotiations over spending and tax policies. Hearkening back to gauzy memories of prosperity in the late 1990s, Democrats have argued in the last few months that a return to Clinton-era tax rates won’t hurt the economy.
That isn’t exactly a new argument, but it is one that Democrats have used more frequently as Republicans argue that tax hikes will damage the currently stagnant economy and already-anemic job creation. Bill Clinton raised taxes and the economy grew in the late 1990s – so why not do the same thing again?
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That argument ignores a lot of the context in both the current economy and the economy of the 1990s. As we approached the middle of the decade, the Internet’s economic potential began to explode – and investment followed, and the economy leaped into high gear. So much capital flowed into this brand-new market that the trend became irrational, producing the dot-com bubble that popped as Clinton was leaving office.
This produced the recession of 2000-1, which became exacerbated by the 9/11 attacks on the World Trade Center and the Pentagon. The Bush-era tax rates reversed the recession and produced solid economic growth for more than three years, as well as increases in federal income-tax revenue and decreases in the federal deficit, as this chart from Investors Business Daily based on White House data demonstrates:
The Bush tax cuts get the blame from Democrats and the media for our current deficit problem, but that’s clearly not the problem. While the economy grew, so did revenues. What stopped the economy from growing? The explosion of the housing bubble in 2007-8, combined with the crisis it caused for financial institutions that had heavily invested in Fannie Mae and Freddie Mac bonds that helped to inflate it, crashed the economy and threw millions out of work.
That bubble also started in the Clinton era, albeit with plenty of assistance from Republicans who wanted to be seen as promoting home ownership and fairness. Congress under control of both parties gave Fannie and Freddie carte blanche to create mortgage-backed securities on bad loans in order to fund this bubble. When housing prices inevitably snapped, after a ten-year holiday from their traditional linkage to the rate of inflation, vast sums of imaginary wealth disappeared nearly overnight.
In other words, the prosperity of the Clinton years was in significant part a fiction based on irrational market behavior, boosted in one instance by significant distortion introduced by government policy. That’s also true for a good part of the Bush-era prosperity, as the irrational housing valuations lured homeowners into the habit of treating their homes as ATMs to cash out on rapidly-rising equity, which crashed out in 2008.
But the deficit crisis didn’t come from a reduction in federal income-tax revenue from George Bush’s tax policies, as we can see above. As far as relating it today, we have no new emerging market on the scale of the Internet on which to count for future economic growth, at least not at the moment, to balance out the constrictive impact of seizing more capital through tax hikes.
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Nor is that the only bit of ill-informed Clinton nostalgia of late. On NBC’s Meet the Press last Sunday, the roundtable argued that Clinton balanced the budget mainly on defense cuts. Cato’s Steve Hanke says Clinton did have the largest reduction in federal spending in the past 60 years as measured in percentage of GDP, but the reduction came primarily from domestic cuts – not defense.
In his eight years as President, Clinton reduced federal spending to 18.2 percent of GDP from 22.1 percent, thanks in large part to a Republican-controlled Congress that forced the issue. Defense spending as a portion of GDP declined by 1.8 points, but non-defense spending dropped by 2.2 points. Clinton and the Republicans in Congress cut spending on domestic discretionary programs as well as entitlement spending through welfare reform.
What followed afterward is instructive to the real problem of our current trillion-dollar trajectory of deficit spending. George Bush increased federal spending as a share of GDP by 2.6 points in two terms, and it wasn’t just spent on defense; the increase was split evenly between defense and non-defense spending, a remarkable statistic considering the two wars waged in those eight years.
Barack Obama managed to hike it 3.5 points in just one term, with 3.2 points going to non-defense spending. Under Obama, federal spending now exceeds 25 percent of GDP, and his has been the biggest increase of any of his predecessors over the last 60 years – even for two-term Presidents.
The real debate over deficits isn’t over whether to go back to Clinton-era tax rates. It’s how to get back to Clinton-era spending levels, and then create a tax system that will adequately fund it. The 18.2 percent level of federal spending is one piece of Clinton-era nostalgia worth recalling – as well as the bipartisanship that eventually produced it.