Debating if Prosperity Happens, or Is Policy

It has suddenly become one of the central questions of the presidential campaign: Who deserves credit for the longest economic expansion in U.S. history? Did the White House help foster it, or were the Democrats, as Republican presidential nominee George W. Bush contends, just lucky?

More than anything else, the answer turns on whether one of the most momentous policy struggles of the last generation--the agonizing effort to shrink, then erase the federal budget deficit--made an economic difference or not.

If it did, as most economists believe, then President Clinton and Democratic presidential nominee Al Gore deserve some credit for presiding over not one, but two huge deficit-reduction deals: in 1993 and again in 1997.

If it didn’t--as Bush in effect argues--then not only is one of the Democrats’ most prominent claims to glory headed for the trash bin of history but so is one of his father’s: the 1990 deficit deal that’s widely seen as having cost the former president reelection.

“When you assess economic credit, it’s important to give [the elder] Bush some for his courage in 1990,” said Alice M. Rivlin, a former Clinton administration budget director and vice chairwoman of the Federal Reserve who is now at the Brookings Institution think tank in Washington. “It’s ironic that his son’s team doesn’t think what he did counts for anything.”

To be sure, in arguing that Washington had little to do with the current boom, the younger Bush takes his cue from mainstream economists who have become increasingly impressed with the economy’s ability to grow on its own and increasingly unimpressed with government’s capacity for spurring growth.

In addition, some in the GOP camp argue that Bush’s sharpest criticism of his rival does not focus on what caused the boom, so much as on whether Clinton and Gore took adequate advantage of prosperity to overhaul Social Security and Medicare and to improve education.

“Gov. Bush believes that credit for the economy goes to people in the private sector,” Bush spokesman Ari Fleischer said. “To the degree that anyone in government deserves credit, it should go first to [Federal Reserve Chairman] Alan Greenspan and second, should be shared between Republicans and Democrats.”

“To say any president or Congress causes an expansion is pretty farfetched,” said Eugene Steuerle, a former Reagan administration economist now with the Urban Institute, a nonpartisan economic and social policy organization based in Washington.

Where Bush and his advisors part company with the mainstream is, in effect, arguing that the deficit reduction of the last decade didn’t play a major role in the boom. To support their position, they offer an account of the 1990s that is markedly at odds not only with that of their opponents, but also with that of many economists and voters.

(Asked whether Bush’s view of deficit reduction represented a rebuke of his father, Fleischer said the GOP candidate “views as a mistake [the elder Bush’s] saying, ‘No new taxes,’ then raising taxes.”)

In an interview last week, Bush’s chief economic advisor, Larry Lindsey, employed that account to make a double-barreled argument against granting the Democrats any credit for the expansion.

Barrel One is that the problem Clinton and Gore claim to have tackled with deficit reduction--the recession of the early 1990s--wasn’t that much of a problem to begin with. The downturn was short-lived, according to Lindsey, and, rather than being a sharp break from the growth of the 1980s, it was a temporary setback largely because of the Persian Gulf War. “It was an anomaly,” he said.

Barrel Two is that the administration’s solution of slashing the deficit, especially in 1993, did not work. Instead of driving down interest rates (because of reduced government borrowing) and thereby reviving growth, rates remained stubbornly high for several years. “If you look at what Clinton said was going to happen, it didn’t happen,” according to Lindsey.

What did happen, in Lindsey’s and Bush’s view, is that growth and new technology during the Ronald Reagan era combined to produce a burst of economic activity and ingenuity completely unrelated to Clinton administration policies.

“The momentum of today’s prosperity began in the 1980s--with sound money, deregulation, the opening of global trade and a 25% tax cut,” Bush said in December in a major speech on taxes. “The economic growth of the 1980s provided the venture capital for the technology revolution of the 1990s.”

There is evidence for at least a few elements of the Republican account. Statistically, for example, the 1990-91 recession was among the shortest on record, and hardly the economic dark age that Democrats are so fond of portraying it as being. In addition, the Clinton administration was as much a follower as a leader during negotiations concerning the 1997 deal.

But in the eyes of many economists, the GOP argument overlooks two critical points: first, how dire the deficit picture was in the early 1990s and, second, how strong the evidence is since then that deficit reduction has delivered on the promise of lower interest rates and higher growth.

“Deficit reduction was a very big deal for financial markets,” said Richard B. Berner, chief U.S. economist with Morgan Stanley Dean Witter & Co. in New York. “I hate to think what would have happened if we hadn’t done it.”

The payoff has come in many forms, but among the most important has been the spectacularly powerful business investment boom. Even Lindsey acknowledges that one of the most distinctive features of the 1990s is not just that new technologies were developed but that corporate America snapped them up at a feverish pace.

Economists such as Berner say that the most important reason was that shrinking deficits made it cheaper to invest by holding down interest rates. The lower rates resulted from the fact that the government wasn’t borrowing nearly as much money, which left more capital available for private borrowers.

On this score, a comparison of the ‘80s and ‘90s is striking. Government statistics show that, as the deficit climbed from a mere 0.5% of the nation’s output to almost 5% between 1981 and 1986, business investment went flat. In contrast, as deficits fell from 2.6% of output to zero over the last decade, business investment has soared.

“Financing the technology boom has only been possible thanks to deficit reduction,” Berner said. Business investment in computer technology alone has jumped nearly fourfold in the 1990s.

But even if Democrats do get the credit that most economists think they are due concerning the economy, Gore still may find it hard running on that record. That’s because deficit reduction makes him ever more dependent on the private economy to help ordinary Americans and ever less able to offer the kind of publicly funded help that has been the Democrats’ trademark.

But then, arguing that Washington hasn’t had anything to do with the boom puts Bush in an awkward spot too. After all, why seek the presidency if not for great undertakings such as spurring growth and lifting the nation’s living standards?

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Deficit Reduction Matters

As the federal budget deficit narrowed in the 1990s, business investment soared. The reason is that, with the government borrowing less money, interest rates are lower and business can invest more cheaply. Comparison of the structural deficit and private business fixed investment, both as percentages of gross domestic product:

Sources: Congressional Budget Office, Commerce Department