The U.S. economy is doing
well. Unemployment is 5 percent, inflation is low, consumer
confidence is at a 28-year high, and the stock market hits new
records every week. Bill Clinton wants Americans to believe that
this is all a result of his fiscal policy centered on the 1993 tax
increase package. Reporters should be skeptical of such claims.
The one good thing that can
be said about the tax increase package is that it mostly went to
deficit reduction. While Clinton and the then-Democratic Congress
couldn't resist boosting some domestic spending, the new taxes were
largely directed towards the deficit. For this, Clinton does deserve
However, that's not to say
that the economy wouldn't be in even better shape if the deficit
reduction had been achieved by reining in federal spending. And it
is also not at all to say that federal fiscal policy is the sole
determinant of economic performance it isn't. Five other variables
within the control of government stand out as much of the reason for
A rise in free trade.
The policies of free trade, pursued by Republican Presidents in the
1980s and Democrat Bill Clinton in the 1990s have certainly helped
the economy. Exports now constitute over 11 percent of GDP (up from
eight percent less than two decades ago). Not only does free trade
create new jobs and opportunities, but the jobs that are created are
good ones in the U.S. today, salaries in exporting sector industries
are 13 percent higher than those in manufacturing generally.
The peace dividend.
The end of the Soviet empire has enabled America to dramatically cut
its spending on defense. This dividend has paid off particularly
handsomely for Bill Clinton. Consider that in just the four years
that Bill Clinton has been President, defense spending as a share of
the total economy has shrunk from 4.5 percent in 1993 to 3.4 percent
in 1997 (it was 6.1 percent ten years ago). Versus one decade ago,
literally hundreds of billions of dollars in resources have been
freed up to go to other more productive uses in the economy.
Defeat of the Clinton
health care package. If the small bit of good news of 1993 was
that the Clinton tax increases mostly went to deficit reduction, the
better news of 1994 was the defeat of the Clinton health care plan.
By preventing the nationalization of one-seventh of the American
economy, the Congress saved our health care system and prevented
what surely would have been a huge drag on the economy in the form
of tens of billions of dollars in higher taxes to feed hungry
Sound Federal Reserve
policy. Firm, consistent policy from the Fed in the fight
against inflation has created a sense of security both at home and
abroad in the nation's financial markets. The problem with inflation
is not primarily that individuals have to pay higher prices in the
short term (higher wages often offset these higher prices), but
rather longer-term consequences on investment.
As Herbert Stein observes,
"A high rate of inflation is bound to be an uncertain rate of
inflation, and the uncertainty depresses long-run investment and
retards the growth of productivity. Moreover, if a high rate of
inflation is tolerated it will probably escalate, but the escalation
will not be allowed to go on forever, and its ending will almost
certainly involve a recession with increased unemployment."
Generally successful Fed policy since the early Reagan era has
helped to continually build the long-term confidence of the stock
and bond markets.
The prospect of a
balanced budget. Wall Street investors this year have surely
been buoyed not only by the prospects for a balanced budget in 2002
but also by the strong chance of some type of capital gains tax cut.
And although the balanced budget package is built upon all the new
taxes enacted in 1990 and 1993, at least it goes the rest of the way
to balance (on paper, that is) without new taxes.
That's not to say the
budget deal is all that both parties say it is. Taxes are cut only a
tiny amount (a little more than one dollar per week for the average
American) and much of the tax cut is designed more to win votes than
to boost economic growth. Further, most of the spending cuts are
delayed until the final two years of the deal, thereby casting doubt
on whether we really will reach budget balance. Still, its approach
is better than any other recent deficit reduction package.
Beyond these five public
policy reasons, there have been important private sector
developments which have helped with growth. One is increased
globalization of the economy, which has benefitted both American
manufacturers and consumers. Another has been the wave of
downsizings in corporate America which left us with leaner and
better management structures.
We're doing well now, but
that doesn't mean we couldn't be doing better. And given the
challenges the American economy faces in the 21st century first and
foremost paying for the retirement of the baby boomers we need all
the growth we can get. Journalists should keep this in mind when
reporting on the economy.
John E. Berthoud is vice
president of the Alexis de Tocqueville Institution in Arlington,
Virginia (703) 351-4969.