Vice President Al Gore and President Bill Clinton not only took sole credit for today's splendid economy in their speeches last week at the Democratic National Convention, but they also boasted that the Clinton-Gore "new economic strategy" saved the nation from economic disaster. To use Clinton's own allusion to Joe Friday, it's time to set the economic record straight with "just the facts."
Clinton and Gore can cite no specific new policies of their own that improved the economy. To his credit, Clinton appointed Robert Rubin Treasury secretary and twice reappointed Alan Greenspan, who was originally appointed by President Ronald Reagan, chairman of the Fed. Clinton and Gore also deserve enormous credit for courageously resisting the protectionists within the Democratic Party when they pushed through the Congress a North American Free Trade Agreement and supported open trade with China, which were originally Reagan ideas.
But what about the uniquely Clintonian element of the so-called "new economic strategy"? In 1993, Clinton proposed - and a Democratic Congress enacted - the largest tax increase in history. During his valedictory speech, the president poked fun at some admittedly overheated Republican rhetoric at the beginning of his administration when the GOP minority was desperately attempting to stave off the Clinton tax increase. But again, Clinton and Gore both overreached themselves by contending that not only didn't the Clinton-Gore tax increase harm the economy, but it was, in fact, responsible for generating huge budget surpluses and sparking the economy's recovery and recent boom. Here are the real facts.
It was recessions and excessive spending, not tax-rate reductions, that caused large,
persistent budget deficits, and it was economic growth, not tax increases, that finally eliminated them. The 1990-91 recession was not a product of the economic policies of the 1980s as Clinton contends. The economic downturn resulted largely from the 1990 tax increase and a regulatory overreaction to the savings and loan crisis, both of which were considerable departures from the pro-growth, "supply-side" policy mix that had created the economic boom of the 1980s. Clinton's policies had nothing whatsoever to do with reversing America's economic fortunes because the short economic contraction was over before he took office in 1993.
In fact, as former Treasury Department economist Aldona Robbins points out, the economic recovery from the 1990-91 recession that occurred under Clinton's watch was "less robust than earlier ones." During President George Bush's last year in office, the economy grew by more than 3 percent after inflation. During Clinton's first year in office, the year of the tax increase, economic growth slid to 2.6 percent. Under the burden of Clinton's "new economic strategy," the economy slogged along at the slowest pace ever following a recession until after the Republicans assumed control of the Congress in 1995.
Fortunately, the Fed reversed itself after initially accommodating the Clinton tax hike with inflationary monetary policy, and inflation was squelched. As ing-Barings economist Larry Kudlow puts it, "This inflation decline amounted to an economy-wide tax cut that in effect overwhelmed Clinton's 1993 tax hike."
Then, in 1997, over objections by the Clinton administration, Congress enacted and convinced the president to sign a real capital gains tax cut to accompany the "inflation tax cut," and the economy took off, growing in excess of 4 percent annually ever since. As a result, between the start of the economic recovery and the beginning of this year, real economic output increased a total of 36 percent.
That performance sounds impressive until one realizes how far short it falls by comparison to what occurred in the early 1960s, when the economy was propelled out of a recession by John F. Kennedy's tax rate reductions, and national output increased by almost 53 percent. If we had stuck with the "old" Reagan economic strategy and cut tax rates and overhauled the tax code instead of employing it for more social engineering, GDP would be at least a trillion dollars larger today, and budget surpluses would be even larger. We are prosperous today in spite of Clinton's "new economic strategy," not because of it. Thank the American people and the Republican Congress for that.
When Gov. George W. Bush debates Gore, I hope he asks him if he really believes the economic expansion was set in motion by the Clinton-Gore tax increase, the same tax hike for which he takes credit for casting the tie-breaking vote, the same tax increase that led the electorate to take control of the Congress away from the Democrats. If he says yes, Bush should then ask him if his solution will be to raise taxes if the economy weakens again.