Right Thinking From The Left Coast
I find that the harder I work, the more luck I seem to have. - Thomas Jefferson

Monday, January 03, 2011

Mythologizing the Clinton Myth

Just to strangle a meme ... Yossi Gestetner is one of many people responding to Democrat talking points about the Clinton tax hike.  The Democrats are claiming that the 1990’s economy boomed because of Clinton’s tax hikes.  Gestetner points out, correctly, that the economic recovery actually began before Clinton even took office:

In the twelve months leading up to the tax signing (August 1992-July 1993), the economy gained 2,023,000 jobs, which is 168,000 jobs per month.  To put things into perspective: in the four years during which Democrats recently controlled Congress, we did not have a twelve-month period where the economy gained 100,000 jobs on a monthly average, let alone 168,000 to meet an economy of fifteen years earlier.

In the six months (February-July 1993) leading up to the tax signing, the monthly average job gain was already 208,000, which shows that the economy was growing stronger by the month, well before the bill was signed.

The unemployment rate peaked July 1992—more than six months before Clinton stepped into the Oval Office, and more than twelve months before Congress voted on the tax bill.  In fact, the rate lost almost a full percentage point in the twelve months leading up to the tax signing.

He goes on to say that the economy grew despite the Clinton tax hikes but that Clinton left the economy in tatters at the end of his term.

There are several problems I have with this analysis.  First, the economy recovered before the Clinton tax hike ... but after thus Bush tax hike. So Yossi is in the uncomfortable position of saying that one tax hike was OK but the other one was bad.

Second, blaming the 2001 recession on Clinton is a bit silly.  The 2001 recession—one of the shortest in history, incidentally—was a combination of a hangover from the dot-com boom and 9/11.  To the extent that Clinton cause long-term damage to the economy, it was his 1997 tax cut, which, among other things, increased the tax exemption for people selling homes and helped encourage the housing bubble (albeit to a very small degree).

Third, saying the economy succeeded “despite” the tax hikes is the equivalent of Obama’s “we would have lost more jobs without the stimulus”.  It’s an unprovable counterfactual.  It’s might be right, but there’s no way of testing it.

Finally—and the reason for this post—is that I think he’s ignoring the elephant in the room.  What really sustained the economy was deficit reduction. I know this is anti-matter to Keynesians, who thinks deficits are awesome.  But when you look at the 90’s, deficit reduction played a huge role in the economy. As the deficit shrunk, investors didn’t have to shovel money into government bonds to finance bridges to nowhere.  Instead, they were able to pour money into the dot coms.  And while that created a bubble, it also created lasting financial success in businesses like Amazon and Ebay.  The 1997 tax cut helped by slicing capital gains taxes.

Even better, Clinton left the dot com boom alone, for the most part.  You can imagine what might have happened if, instead of letting the dot com industry develop on its own, the Clinton Administration had approached it in the command-control-and-spend manner with which Obama is approaching the so-called Green Industry.  (Actually, in case you’re still hungover, Jack Shafer has imagined it for you).

For all Clinton’s hippy talk and the GOP speaking in tongues, the combination of the two got us six years of simplified regulation, controlled spending and benign neglect.  I have small hope that Divided Power: The Sequel will go as well—the current combination feels less like The Wrath of Khan and more like Highlander 2. But if we could get all that in exchange for a small tax hike, I’d take it.

Posted by Hal_10000 on 01/03/11 at 09:51 AM in Politics   Law, & Economics  • (0) TrackbacksPermalink
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