Robert Reich: Why Democrats Should Disregard Bill Clinton’s Endorsement of Obama’s Tax Deal

[ProSense]

Why Democrats Should Disregard Bill Clinton’s Endorsement of Obama’s Tax Deal

Saturday, December 11, 2010

Bill Clinton seems the perfect validator for Barack Obama — which is why the President is utilizing the former president for selling his tax deal. After all, the economy boomed when Clinton was president and 22 million net new jobs were created. What’s more, Bill Clinton was reelected — even though he lost both houses of Congress in the 1994 midterms.

But the analogy falls apart as soon as you realize Clinton’s economy was vastly different from Obama’s. The recession Clinton inherited was relatively small, and caused by the Fed raising interest rates too high to ward off inflation. So it could be reversed by the Fed lowering interest rates — as the Fed did in 1994. By 1995, the so-called “jobless recovery” had morphed into a full-blown jobs recovery. By 1996, at pollster Dick Morris’s urging, Clinton could proclaim to the American people “you’ve never had it so good, and you ain’t seen nothing yet.”

The Great Recession has been far larger, caused not by the Fed raising interest rates but by the bursting of a giant housing bubble. In 2008, the biggest asset of most middle-class people, upon which they borrowed and that they assumed would be their nest eggs for retirmenet, collapsed. Housing prices continue to fall in most parts of the country. The Fed has lowered interest rates all it can, and unemployment remains sky high.

Bill Clinton presided over an economic boom engineered by Fed chair Alan Greenspan, who felt confident he could drop interest rates far lower than anyone expected without risking inflation. The result was 4 percent unemployment in many parts of America, as well as the best jobs recovery in history.

The price Greenspan exacted from Clinton — and a resurgent Republican congress demanded — was a balanced budget. As a result, Clinton had to give up much of his “investment agenda” in education, infrastructure, and other long-neglected means of building the productivity of average working Americans. The economy enjoyed a huge cyclical recovery.

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Obviously, there are factors in making these comparisons. President Obama has to deal with a completely different and more servere set of circumstances. Still, I go back to a point made by Krugman in a piece critical of the deal:

On the straight economics, the tax deal is worth doing. But the history of the past two years drives home, if anyone doubted it, that economic policy must be considered from a political economy point of view; that you have to think ahead to how current policies affect the environment in which future policies will be decided. And the more I work on this, the more concerned I’m becoming.

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Edited for clarity.

[mmonk]

1. It's a stretch to put Krugman's economics in the mix

as the US and its tax cut deals are good economics. There is a difference in tax cuts in conjunction with increased domestic spending and tax cuts in conjunction with cutting domestic spending and entitlements.

[ProSense]

2. Don't agree

Dean Baker:

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To be sure, the tax cuts were a bad use of public money. As we know, they disproportionately went to the wealthy. This money could have been much better used rebuilding infrastructure, promoting renewable energy and conservation, or even as tax cuts oriented more toward middle class and moderate income families.

However, the tax cuts were not the economic disaster portrayed in the Democrats' attacks. The deficits were not especially large in the Bush years. And, the economy needed deficit spending to get out of the recession caused by the collapse of the stock market bubble. Furthermore, the trade deficit caused by over-valued dollar inherited from the Clinton Administration, necessitated some alternative source of demand, like a budget deficit, to bring the economy anywhere near full employment.

Unfortunately, the political elites' fixation on the tax cuts and the deficits led them to ignore the economy's real problems.

The housing bubble grew to ever larger proportions, eventually reaching a point where its collapse would lead to the sort of recession that we are now experiencing.

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So, progressives should not be happy about giving more money to the richest people in the country, but it is not the end of the world either. The key focus should be on getting the stimulus needed to boost the economy. It is outrageous that 25 million people are unemployed or underemployed because of the incompetence of the people who design economic policy.

[mmonk]

4. You're quoting Dean Baker.

[ProSense]

5. Yes,

because I agree and understand that tax cuts for the rich are useless, but they did not cause the economic crisis.

On the other hand, there is a solid case for extending unemployment, the middle-class tax cuts and the stimulus provisions in the package. The alternative will negatively impact the economy, and I haven't see a single economist argue otherwise, even as they're arguing that the tax cuts for the rich will needlessly add to the deficit.

[mmonk]

6. They were a contributing factor. It creates a siphon to the top.

[Jakes Progress]

3. Agree. But then

I'm a progressive.