The Clinton Economy
Jude Wanniski
December 26, 2000


To: Richard W. Stevenson, New York Times
From: Jude Wanniski
Re: Bill Clinton’s Economic Legacy

Your Monday report in the NYT five-part series on the Clinton Legacy, “The Wisdom to Let the Good Times Roll,” on the whole is a good job, for which I commend you. The headline itself suggests there was a bit of luck with positive economic forces at work when Clinton arrived in January 1993. This is contrary to his own exalted view that he inherited the “Great Depression” and turned it into a “Great Boom” with his 1993 TAX INCREASE! I had to laugh at your remark that he had turned “Keynesianism” on his head. This is why the new demand-side economic theorists call themselves “neo-Keynesians.” Instead of taxing away the incomes of the wealthy, who were not spending fast enough to keep the economy rolling, Clintonomics taxed away the incomes of the wealthy to pay down the national debt -- the goal being lower interest rates that would spur the economy into greater wealth creation!!

With Fed Chairman Alan Greenspan giving the economic lessons, there was none of the talk of easy money or currency devaluations to grease the economy. If you remember, that was the advice Jimmy Carter got from his Keynesian Ph.D. economists: Pour more money into the banking system and the banks will have to lend it out to fuel demand; so much the better if the dollar weakens in the foreign-exchange market. That will cause Americans to buy fewer foreign goods and will make American goods more attractive to foreigners. Ha ha ha. All we got was inflation and more inflation, a long-term government bond of 15% and a prime rate at the banks in excess of 20%. Poor Jimmy got the boot.

The only beef I have with your story line, Dick, is when you tell about the heart and core of the Clinton plan that “let the good times roll.” Here is how you cover that:

The new administration settled on a plan that called for slightly less than a $500 billion deficit reduction over five years, largely through a tax increase on the wealthy, at a time when the deficit was running at nearly $300 billion a year. He persuaded his party members in Congress to go along, but only barely, and attracted not a single Republican vote in either chamber. Did the plan work? Long-term interest rates did go down.

Now wait just a minute. If you check it out instead of trying to remember what happened, long-term interest rates came down before the Clinton tax increase passed by a single vote in the U.S. Senate. The long bond was at 5.78%, its low point, when the tax hike went into effect, and it then climbed up and over 7%, staying higher than its low point for the next six years. How can you keep a straight face and say the Clinton tax increase lowered the deficit and caused long-term interest rates to decline? In fact, the Clinton tax increase helped cause the increase in interest rates. With a higher tax structure, the economy needed less dollar liquidity in order to operate. When the Federal Reserve did not subtract the surplus liquidity, the dollar price of gold rose to the $383 level from the $350 level. All the Clinton tax increase inspired was a mini-inflation. The way you got around this embarrassing fact, I noticed, was to assert, after your line about “long-term interest rates” going down, that “The economy, which was already strengthening, warmed up so much that the Federal Reserve stepped in to cool it in 1994, driving interest rates back up.” Ha ha ha. That’s another funny. The tax increase was so successful in driving down interest rates that Greenspan had to drive them back up, into the face of an economy that was already strengthening! Dick, if you decide to write a book about all this, you will have to do better than this. While the overall tone of your piece is not so bad, you are still tangled up in the economics. So, by the way, is President Clinton, who still doesn’t understand the last eight years.

You probably did not notice, but I wrote about the Clinton economic record last August 18, after I realized the President was totally confused on the topic. My account has been posted on my home page ever since. Click on it and you will get a fair picture of what happened. And by the way, the Clinton Economic Legacy is yet to be felt. Where Bill Clinton inherited an economy that was climbing out of recession and “strengthening,” George W. Bush is inheriting an economy headed downhill, deflating its way to a lower price level dictated by the Greenspan Fed’s supertight monetary policies over the last four years -- having driven the dollar/gold price to the $270 level from $383. Unless the deflation ends with a reasonably higher gold price, it may take the Bush administration all of its four years to make the inevitable and painful price adjustments. That’s another story, though, one you can write in December 2004 about the Bush Legacy.