The Economy: Clinton Has Played His Cards Well

As Presidents invariably assert, the state of the union is good. More pertinent, the state of the economy is very good. Indeed, if Clinton is spared the further indignity of removal, it will be in no small part because most Americans consider him a competent economic steward. But how much credit does this President really deserve?

A big piece of Clinton's success was good timing. For starters, the 1990s have been a decade of disinflation. After the oil bubble burst, after commodity prices crashed, and after the economy rebounded from the Federal Reserve's tight-money cure of the early 1980s, lower inflation was virtually predestined, no matter who was President.

The high unemployment rates of the '80s and '90s and deregulation further dampened inflationary wage pressures. Moreover, after a prolonged lag, the economy was set to reap the benefits of information technology, yielding higher rates of productivity growth and subsequent economic growth. Disinflation also set the stage for a remarkable surge in the stock market.

So by the mid-l990s, the economy was primed for a period of sustained noninflationary growth. That permitted lower unemployment, which meant workers finally shared in the gains.

BROKER. Still, let's give Clinton--and Federal Reserve Chairman Alan Greenspan--some credit. First, Clinton took big political risks in 1993 to broker a budget deal. Despite Republican resistance to higher taxes and dire predictions of recession, the deal was tolerably fair and macroeconomically appropriate. It combined spending cuts in both military and social programs with modest tax increases for those able to pay. It produced fiscal contraction but at a gradual pace that didn't induce recession.

That, in turn, allowed the Fed to ease the monetary brakes and produce not just a "soft landing" but also sustained growth. The effect of deficit reduction on growth, however, may have been more psychological than real. The Fed and the money markets needed a budget deal in order to deliver lower interest rates. But the budget surplus, which came in 1998, four years ahead of schedule, was mostly the result of higher growth rooted in technological and structural changes. It was not mainly the fiscal fruit of spending cuts and tax hikes.

Clinton nevertheless deserves credit for achieving a collaborative relationship with the Fed chairman. And Greenspan deserves kudos for breaking (albeit belatedly) with the conventional wisdom of most economists and his handlers on the Fed's senior staff. Greenspan, a master at doing his own research, faced down the Fed's hawks and grasped that this New Economy could tolerate higher rates of noninflationary growth after all. The Clinton-Greenspan alliance was in no way inevitable. The last Democratic President, Jimmy Carter, went down in flames not primarily because of the Iranian hostage crisis but because he and the Fed's then-chairman, Paul A. Volcker, were pulling in different directions.

MIXED BAG. Faster growth is the big success story of the Clinton Presidency. Elsewhere, Clinton has been so-so. His performance on international economic matters has been mixed. Russia remains an economic powder keg, and Asia was a near-miss. Brazil reminds us just how vulnerable the whole global system is. NAFTA was oversold, jeopardizing any further liberalization of trade. If prosperity falters, however, it will very likely be the result of an international shock that Clinton and his team lacked the vision to anticipate or contain.

Despite right-wing fervor, growth is not constrained by the lack of a tax cut. If anything, Clinton's critics on the liberal left have the stronger case. He can reasonably be faulted for overdoing fiscal discipline at the expense of needed social investments, for bungling health reform, for paying too little heed to the economy's have-nots, and for being too ready to gut Social Security and Medicare.

In sum, economic events handed Clinton a rare opportunity. But not fumbling an opportunity is harder than it looks. Early in his term when the budget was a nightmare and the economy shaky, Clinton played a weak hand well. Later, as the economy strengthened, he played a strong hand cautiously. Clinton's relatively competent economic stewardship, the source of his political survival, makes his self-inflicted impeachment wounds all the more appalling. Any President was likely to bask in this era of low-inflation and resurgent productivity, but the degree of our current economic success was not quite guaranteed.

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