January 30, 1995
"Economic Policy Should Stress Bigger Pie, Not Just Dividing It"
San Jose Mercury News
By Timothy Taylor
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WHENEVER presidential candidate Bill Clinton sailed into uncharted waters, his campaign advisers were quick to remind him and themselves, "It's the economy, stupid." Thus directed, he defeated an incumbent president.

Clinton is at the halfway point in his term -- (somehow it seems longer than two years) -- and it's a fair time to evaluate how he has handled the economy, the most important issue of his campaign.

We immediately confront a paradox. The economy grew continually through 1993 and 1994. Inflation has stayed low. Unemployment has fallen to 5.4 percent, and 3.5 million new jobs were created in 1994. The budget deficit has declined for three consecutive years.

But despite this strong record, questions about Clinton's economic management are legion, and contributed substantially to the Democratic debacle in the congressional elections. To his supporters, Clinton is inexplicably failing to receive credit for a stellar economic performance.

The real economic picture is more complicated. George Bush was surely no economic mastermind. But he did leave behind an economy where the interest rate and inflation fundamentals were strong, and where job growth was picking up.

The short-term interest rate paid on new U.S. Treasury bills declined from 8.1 percent in 1989 to just 3.4 percent in 1992. Inflation, which had surged to a threatening 5.4 percent in 1990, had been yanked back down to 3 percent by 1992. The economy had started rebounding from recession before the 1992 election; for example, the unemployment rate fell from 7.7 percent in June 1992 to 7.3 percent in October.

Truth be told, Bush's healthy economic legacy deserves more credit for the sustained growth of the last two years than anything Clinton has had time to do. Clinton doesn't deserve a great deal of credit for happening to occupy the White House during an economic upswing that began in the second quarter of 1991, almost two years before he took office.

The deeper lesson here is that presidents shouldn't be judged on the latest monthly economic statistics. Instead, presidents should be judged as economic policy makers according to how their policies affect the conditions for sustained growth. On this measure, Clinton has done fairly well.

He has supported free trade, backing both NAFTA and GATT, a step that helps pressure the U.S. economy to stay at the leading edge of the world's technology. He has quietly continued the deregulation of certain industries like trucking and banking.

Despite what must be a terrible temptation, Clinton has not openly criticized Federal Reserve efforts to keep inflation low, even through those efforts have meant higher interest rates. As a result of Clinton's falling budget deficits, the government is borrowing less and leaving more capital available for private industry.

Of course, since we're talking about Clinton here, none of these policy directions has been unambiguous. Clinton originally wobbled on NAFTA and GATT. Before cutting the deficit, he proposed in 1993 a stimulus package that would have increased it.

But instead of focusing on his successes, and working for more of the same, Clinton seems to have decided that his main economic priority for 1995 will be the "Middle Class Bill of Rights," his high-brow name for a tax cut. This seems a questionable economic step, and awful political strategy.

Economically, there's no reason why the economy needs the stimulation of a tax cut just now. Even if a tax cut passed, the Federal Reserve would probably just raise interest rates a bit faster, in its effort to keep the economy growing steadily without a resurgence of inflation.

Politically, the Republicans will always outbid any proposed Clinton tax cut by offering still more. Clinton will never persuade anyone that he wants to cut taxes by more than Newt Gingrich.

There's a deeper lesson here. Redistribution doesn't make a nation wealthy. Sure, there are arguments for Democratic-style redistribution by raising taxes on the rich and the minimum wage for the poor, and for Republican-style redistribution of cutting taxes along with benefits for the poor. But these are about dividing up the pie in different ways.

To continue building for sustained productivity growth, much remains to be done. Along with the steps Clinton is already taking, the budget deficit needs to be cut further, and private saving must increase. The government should aggressively support research and development, through direct spending and tax credits.

Education, job training and welfare need an overhaul. The health care sector still spends too much and covers too few people. As the population ages, Social Security and Medicare are headed for financial collapse.

Bill Clinton can't control whether a recession happens in the last few years; that's in the hands of fate and the Federal Reserve. He is unlikely to outbid the Republicans on tax cuts, and unlikely to win re-election as a supporter of benefits for the poor. But if he focuses on productivity growth and long-term economic health, Clinton has a chance to make Americans again feel confident about their economy.

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