Sanity Check

Courtesy of FiveThirtyEight:

When Hillary Clinton laid out her economic vision for her prospective presidency in a speech last July, she made sure to work in a shoutout to her husband’s economic record as president. “The results speak for themselves,” Clinton said. “Under President Clinton — I like the sound of that — America saw the longest peacetime expansion in our history.”

Now Clinton is doubling down on that message. On Sunday, she told voters in Kentucky that she would put her husband “in charge of revitalizing the economy” because “he knows how to do it.” Aides subsequently told The New York Times’ Amy Chozick that the former president would more specifically focus on parts of the country that are struggling.

Whatever Bill Clinton’s exact role in a Hillary Clinton administration would be, it’s no surprise that she is looking to tie herself to his economic legacy. Bill Clinton’s second term was the last time the U.S. economy was unequivocally strong; for most voters this November, it was the best economy they’ve ever known. But while Hillary Clinton wants voters to look back fondly on the first Clinton presidency, she should hope they don’t remember too much about what happened next.

The economy at the end of Bill Clinton’s term was really, really good. In 2000, the final year of his presidency, the unemployment rate dropped below 4 percent for the first time in three decades, while the share of adults that were working hit an all-time high. Wages rose steadily. The stock market soared. The budget deficit turned into a surplus. Inflation, much to the surprise of many economists, stayed under control.

Perhaps most importantly, the late 1990s were a period of shared prosperity. The strong labor market drove up wages for workers throughout the earnings ladder, while drawing in people who traditionally struggle to find work, such as convicted felons and the disabled. The racial wealth gap narrowed. Inequality continued to rise, but families of all income levels saw gains.

The bursting of the tech bubble in 2000, and the subsequent recession, revealed that the 1990s boom was, at least to some degree, a mirage, the result of cheap money and, in then-Fed Chairman Alan Greenspan’s famous phrase, “irrational exuberance.” The recession that followed the tech bust, however, was relatively mild. If that were the worst consequence of the Clinton era, it might seem a small price to pay for a decade of solid growth.

But the Clinton boom, and even some specific Clinton policies, also helped sow the seeds for the far more severe Great Recession of the late 2000s. Mortgage-backed securities and subprime loans weren’t invented in the 1990s, but they expanded greatly during the period, part of a broader “financialization” of the U.S. economy that contributed directly to the severity of the Great Recession. Critics on the right argue Clinton-administration policies promoting increased lending to low-income and minority applicants contributed to the subsequent bubble; critics on the left, including Bernie Sanders, argue that Clinton’s deregulation of the banking industry paved the way for the crisis.

Bill Clinton deserves, at most, a small sliver of the blame for the financial crisis. But he probably doesn’t deserve much credit for the late-’90s boom, either. The reality is, presidents have at best limited influence over the economy. Clinton’s economic policy was determinedly centrist: modest tax increases, free trade (including the signing of the North American Free Trade Agreement) and limited government regulation and spending (the latter due in part to the Republican Congress). Those policies no doubt affected the economy, for good or bad. But their impact pales in comparison to that of forces beyond Clinton’s control: the rise of the internet, the entrance of the baby boomers into their peak earning years, the “peace dividend” that came from the fall of the Soviet Union.

It is a stretch, then, for Hillary Clinton to argue that her husband — or anyone else — “knows how” to ensure a good economy. But there are still lessons to take from the late 1990s. Most importantly, that low unemployment is crucial to generating wage gains for low-income workers — and that a period of such low unemployment need not lead to runaway inflation. The surest way to create an economy that works for everyone is to make sure that anyone who wants one can have a job.

Quote of the Day

From Yves Smith:

"Hillary has the classic resume of someone who has failed upward: a series of every-splashier job titles, but with no or negative accomplishments."

The False Narrative

Per David Sikora:

The availability of financial information and "new economy" companies created intense upward pressure on stocks from all sectors as the world ushered in a new millennium. Between 1994 and 2000, the Dow Jones industrial average exploded from 3,834 to 10,786, while the Nasdaq jumped from 751 to over 4,000. Over the same period, the value of shares traded on the New York Stock Exchange increased nearly fivefold, from $2.45 trillion to $11.06 trillion, though even it paled in comparison to the value of shares traded on the Nasdaq, which grew ninefold from $1.45 trillion to $20.40 trillion.

The flurry of stock trading that took place over this period created sizable short- and long-term capital gains, delivering the windfall that led to the federal government's budget surplus. These were unusual circumstances that political leaders just happened to be in the right place at the right time to oversee — not the result of a coordinated set of policies implemented by the Clinton administration, or by elected officials from either party for that matter.

As the presidential campaign season heats up, we will undoubtedly hear candidates advocate higher taxes on American citizens, arguing that greater taxation on productivity will not drive behavioral change but will inexorably bring the country back to the golden age of budget surpluses we enjoyed when Clinton was in the White House. But without an innovation as profound as the Internet, higher taxes on Americans — who themselves are often job creators — could be more of a dangerous drag than surefire solution for the U.S. economy.

Economics Always Trumps...

Per Stratfor:

Pakistani foreign affairs adviser Sartaj Aziz recently confirmed that his country was still interested in resuming the comprehensive bilateral dialogue with India. Although having custody of Jadhav may strengthen Islamabad's bargaining position — and thus give Pakistan a compelling reason to revive the talks — economics offers a more likely explanation for Aziz's statement. The ruling Pakistan Muslim League-Nawaz party faces an election in 2018. If Sharif wants his party to avoid the fate of its predecessor, the Pakistan People's Party, which was voted out of office in 2013 over its poor handling of the economy, he will have to reinvigorate his stalled economic reforms. Warming ties with India could provide the jump-start the Pakistani economy needs by facilitating a more robust trade relationship between the two.