issues2000

Who gets credit for the good economy?




Anonymous asked this question on 8/3/2000:

When the U.S. is in a time of either economic prosperity or deficit, who deserves the credit and/or blame- the President or Congress?



A viewer asked this question on 8/21/2000:

How much credit can the Clinton administration legitimately claim for the last ten years of economic expansion? What roll does congress play in the fiscal policies of the federal government? Finally, where can I find a website that presents facts on how fiscal policy is actually set and executed?



JesseGordon gave this response on 8/21/2000:

Everyone takes credit for a good economy and everyone blames their opponents for a bad economy.

The Democrats in this election cycle credit Clinton & Gore for the good economy, since "the longest economic expansion in America's history" (Gore endlessly repeats that phrase) occurred during this administration.

The Republicans in this election cycle credit the GOP-majority congress, for its fiscal austerity in getting rid of the budget deficit and holding the line on spending.

Both deserve some credit, just as both deserve some blame during recessions. But policy wonks (like me) put the blame and credit much more squarely on the Federal Reserve and its chairman Alan Greenspan.

The Fed regulates monetary policy by tightening and loosening credit. You hear about their monthly meetings when they decide to raise or lower interest rates. Lowering rates "loosens" the economy for more growth and raising rates makes "tighter money" and reduces growth. The goal is slow steady growth with limited unemployment (which is what we've had now for a few years).

Even Republicans in Congress credit Clinton for re-appointing Greenspan, and even Democrats credit the GOP Congress for confirming his re-appointment.

Details on how the Federal Reserve works, with further links, can be found at http://www.issues2000.org/Background_Budget_&_Economy.htm



madpol gave this response on 8/17/2000:

Between Republicans shunting aside the public's business, first for a government shutdown and then for the impeachment hearings, and Clinton's vetoes I'd say there is an even split on the credit. This was a period when doing nothing--neither corporate subsidies, tax shifts or new regulations--was the right thing to do.

The last 4 years Government has shown that it can be good at doing nothing.

The one exception was Clinton's Health Care initiative. Although not as ambitious as he had hoped for, portable Health Care packages and expanded coverage turned out to be a key factor in enabling thousands of new business startups. And it is those new businesses that are both driving the economy and creating the labor shortages that spread the wealth around.



A viewer asked this question on 8/24/2000:

For years now the republicans in Congress have been claiming that their spending cuts have created the surplus we have now. I would certainly like to know, not withstanding our booming economy, is the large surplus primarily due to spending cuts or the increased tax rates that the Clinton administration put in place in 1993? Is there a website that would explain this and give figures and statistics? I would certainly appreciate any and all information you can give me on this matter. Thanks a million.




budgetanalyst gave this response on 8/24/2000:

The surplus is mostly due to improved economic conditions. Everybody should claim credit for this - the President, the Congress, and the American worker.

As far as fiscal policy is concerned, the surplus is mostly due to tax increases that went into effect during the Reagan Administration (believe it or not, but true). Most of the surplus is due to Social Security taxes, which were increased as a result of the recommendations of a commission to study social security, which reported in 1981. In 1986 there was a major reform of the income tax system, which eliminated many deductions and increased the basis for revenues substantially. These tax changes have come to fruition in terms of increased revenue due to overall economic conditions - boom times increase the government's tax receipts and decrease some of its social welfare expenditures.

I am sure that the tax increases of more recent vintage had an effect as well in reducing the deficit, but I would not call them Clinton's increases; Congress has done nothing since 1995 to change them, with a Republican majority. Cuts in expenditures have also played a role, but not a very large one - keep in mind that many "cuts" are simply reductions from a level that had been assumed, not an actual reduction from one year to the next.

For more discussion of some of these issues and an extensive collection of links to relevant web sites, please go to my web site, www.budgetanalyst.com. There you will find some of my own writings (in FAQs) as well as links to the Washington Post's budget analysis (good on the deficit and surplus) as well as links to the CBO and the Center for Budget and Policy, both good sources of analysis on the issues related to the surplus and deficit.



A viewer asked this question on 8/17/2000:

A previous viewer asked Republicans only to give explanations for the current prosperity. I'd like to invite Democrats to answer the same question. How much credit should go to Clinton and/or the Congress? In the spirit of fairness, socialists, libertarians, and other non-Republicans are also invited to answer.



stevehaddock gave this response on 8/17/2000:

As my fellow Canadian Dave Foley has been quoted as saying "You have to remember that as a Canadian I am a Communist". Well, somewhere on the left side anyway.

The answer is, a little credit should go to both Clinton and Congress.

During the bad times, real interest rates (the spread between the rate of inflation and the best possible lending rate) generally are very high (this was true of the Great Depression and most major recessions). High real rates tend to discourage investment (equity is fine, but most corporations choose debt to expand and don't do so in bad times). There is a well recognized relationship between real interest rates and the unemployment rate - the higher the real rates, the higher the unemployment rate, and vice versa. However, the flip side is that the higher the rates, the lower inflation goes. Ergo, you can set interest rates anywhere you want to get the best balance between high inflation and high unemployment. However, you can't have low inflation and low unemployment at once - although it is possible for both of them to be high at once (like in the 1970s when the price of oil skyrocketed).

From the late 1970's to the mid 1990's, the world's central banks (including Alan Greenspan at the Federal Reserve) kept real interest rates high to fight inflation. It worked! Inflation fell from about 10% to about 1%. However, unemployment, which was high in the 1970's, continued to increase as well because corporations couldn't afford to borrow money.

In addition, the world's economists had a theory (and that's all it was) that if you could reduce inflation to zero, economic growth would be fantastically high! They also had another theory that there was a "natural" unemployment level that if you came below it, inflation would skyrocket. For the U.S., the "natural" rate was assumed to be about 6%.

However, as unemployment got worse, political leaders across the globe, including Clinton and both parties of the Congress, started putting pressure on the Central Banks and the Fed to lower rates. After all, inflation was next to zero and unemployment was unbearable.

Luckily, the Central Banks all agreed, grudgingly. The effect has been, as most Americans know, miraculous. The U.S. unemployment rate has fallen to about 4% with no discernible effect on inflation. Talk now is "where are we going to find the workers?" - something that hasn't been heard in the U.S. since the 1950s. The U.S. effectively has "full" employment - those people who are currently unemployed regrettably lack the skills for approximately 500,000 jobs that are available.

However, Clinton can't take too much credit. Here in Canada, and over in Europe, unemployment is generally heading into the cellar and government revenues are climbing as more people find work, much because of the same interest policies.



Anonymous asked this question on 8/3/2000:

When the U.S. is in a time of either economic prosperity or deficit, who deserves the credit and/or blame- the President or Congress?



stevehaddock gave this response on 8/3/2000:

Trick question, it's neither. The Federal Agency with the most influence over the economy is "The Fed", the Federal Reserve Bank.

Modern economic theory holds that an economy's health is highly dependent on "real interest rates" or the difference between the prime lending rate and inflation. For example, if inflation is running at 10% and the lending rate is 11%, the real rate is 1%. However, when the inflation rate is 1% and the inflation rate is 4%, the real rate is 3%. This represents the "real cost" of borrowing money as loans are always repaid in the currency of the future, which is usually worth less than the currency today.

It is also generally accepted that if real interest rates are too low (or negative) this fuels inflation as money is "too cheap". However, if real interest rates are too high, this causes unemployment as no-one wants to borrow to build the means of production.

Therefore, and economics has borne this out, the trick is to keep inflation at manageable levels while keeping unemployment within manageable levels too. A good balance is about 4% inflation and 4% unemployment - which are good historical levels.

What happened in the Great Depression shows this in action. When the economy started collapsing in 1930, money flowed from stocks to government bonds. Moreover, inflation was stopped dead and the prices of commodities actually started falling! With an effective rate of inflation of 0%, governments initially started lowering interest rates, but that made people lending money to the government angry, they demanded "better returns" or else they would take their money elsewhere! As a result, the government raised interest rates, which had the result of further dampening the economy. It was only when interest rates were lowered to pay for World War II that everything turned around.

Moreover, there is "money" inflation and "real" inflation. Money inflation is what Germany had in the 1920's when the government prints currency and interest rates are too low. However, real inflation is when the price of a necessary commodity goes up and the sellers refused to be paid in anything other than "hard currency" (like oil during the 1970's, and now). Governments can control money inflation with interest rates, but can do little to control the price of oil (and don't say lower taxes! that move just makes governments go broke, like a lot of them did during the depression).

Another thing that made things worse in the 1980's were two unproven economic theories. The first was that lowering inflation to zero would have tremendous economic benefits (turned out the assumptions behind that finding were flawed). The other was that industrial economies had a "natural" unemployment rate and that lowering unemployment below that rate by lowering interest rates would cause runaway inflation. In case you think that one was right, the U.S. went below that rate two years ago, and inflation is still running at less that 2%.

However, in most countries, interest rates aren't set by the legislature (Congress) or the Executive (the President). They are set by the central bank, in the U.S. that's The Fed. These central banks were created, ironically, during the Great Depression, to deal with these problems and to keep politicians out of the mix.

Central banks did well until the 1970's when the rules changed. Countries were generally on the gold standard until 1973 when the U.S. dropped it to borrow money for the Vietnam War. At the same time, oil prices rose, causing real inflation and, at the same time, unemployment as the Arabs didn't spend the money they were collecting fast enough. Seven years later, inflation had to be "put under control" and most central banks were run by people with "high interest rate, anti-inflationary" policies. How high? At one point, the prime lending rate was over 20%! This is when inflation was running about 10%! Inflation was stopped in its tracks, but so was economic growth.

Finally, by the mid 1990's, governments tired of high inflation generally pressed the central banks to forget about fighting inflation and think about employment. Germany was the first to do this (to integrate East Germany), and Japan got away with it too (to rebuild after the Kobe quake). Their currencies went into the toilet, but unemployment dropped rapidly.

stevehaddock recommends buying a book with the title, author, or subject: The Cult of Impotence.



Anonymous rated this answer:

A very thorough answer, but I was looking more for the political side of the issue than the economic explanation. Thanks, anyway!


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