Power of progressive economics: The Clinton years
What we can learn from former president's achievements
President Bill Clinton’s economic strategy focused on policies that invested in people, innovation, and infrastructure—investments that strengthened communities and our middle class.
By pairing that strategy with a smart fiscal approach, his administration and Congress during his two terms in office transformed a weak economy into a fundamentally strong one, turned deficits into surpluses, and created the conditions for strong future growth. And because he saw the changes globalization would bring to the world economy, his administration began to push for the kind of solutions our country would need to prosper in the 21st century as well.
Unfortunately, policymakers in the eight years that followed the Clinton presidency failed to build on this strategy, and the United States’ position of strength was lost. As a result, the U.S. economy faces even greater challenges today than it faced when Clinton took office.
Unemployment and growth are still weak in the wake of the Great Recession, and technology and globalization have wrought deep structural changes that policymakers have not adequately addressed. Yet many of the strategies Clinton championed can and should be used now more than ever, to strengthen the middle class, invest in the future, and put the economy on a firm path to growth once again. This issue brief examines the accomplishments of the Clinton era and highlights the lessons we can learn for use today.
A record of accomplishment
In December 1992 President-elect Clinton convened business owners, labor leaders, and economists for an economic summit in Little Rock, Arkansas. He would be inaugurated in Washington only a month later but the experts who gathered there that day were deeply worried about the challenges the country faced when they took office.
For one, the unemployment rate in 1992 was 7.5 percent, up from 6.9 percent the year before. And though the economy had started to grow again in 1992 after contracting in 1991, prospects for dramatic economic progress were still relatively dim. The Congressional Budget Office, for example, expected unemployment to remain above 6 percent for at least three more years, and they foresaw rather pedestrian overall economic growth. Just a month before Clinton’s inauguration, The New York Times ran an article with the headline, “Gloomy Prospects Seen for Growth Worldwide in ‘93.”
This anemic economic growth was also doing less and less to benefit the middle class and those striving to join it but more to benefit the top earners. As then-Gov. Clinton said when he announced his run for president, the middle class was spending more time on the job, less time with their children, and bringing home less money to pay for more health care, housing, and education. While labor productivity increased 17 percent in the 1980s, real average hourly earnings in December 1992 were less than they were when President Ronald Reagan took office in 1981. At the same time the cost of health care was up more than 20 percent and the cost of housing had risen by 10 percent overall.
Finally, Clinton’s incoming team was starting to realize that they were inheriting a tremendous fiscal challenge as well. In January 1993 the federal budget deficit for that year was expected to top $300 billion, or 5 percent, of gross domestic product—the broadest measure of our economy—and the Congressional Budget Office predicted that the United States would add more than $1.8 trillion to the national debt through 1998.
Yet over the next eight years, President Clinton presided over one of the most impressive economic turnarounds in modern history. By the end of his term, 22.7 million new jobs had been created, unemployment dropped to a 30-year low, and gross domestic product grew by 35 percent overall through the longest period of sustained growth in U.S. history.
What’s more, the growth was broadly shared and unemployment plummeted across the board, including those groups for whom the economy never worked very well.
Average hourly wages increased by 6 percent after accounting for inflation, and median household income grew by 14 percent, the highest increase for a two-term president. The median income of African American families increased by a third and Hispanic families saw their median incomes rise by almost $7,000. Poverty rates dropped to near record lows. And of course the federal budget went from enormous deficits to enormous surpluses, with the federal government on track to becoming effectively debt free by 2009—for the first time since Andrew Jackson was president.
How did President Clinton take a badly struggling economy and turn it into one that hummed along at an average of 4 percent real growth over the entire eight-year presidency?
It turns out, policy matters. Of course, many factors beyond a president’s control also shape economic outcomes. But bad economic policy can cause damaging distortions or hold the economy back, as President Clinton’s predecessors experienced. Good policy, in contrast, can reduce economic obstacles, strengthen positive economic trends, and, most importantly, help lay the groundwork for future growth and prosperity. And fundamentally, the Clinton administration put our country on a stronger and more equitable fiscal and economic path for many years to come. Specifically, the Clinton administration made good policy decisions that:
Taken together, these policies helped pull the economy out of the morass of slow growth and high unemployment that President Clinton inherited at the start of his term. And his policies laid the foundation on which the private sector and American workers could build eight years of unprecedented economic success. Let’s explore each of these legacies in turn.
Middle class led growth
Fundamentally, the middle class is the engine of U.S. economic growth and prosperity. A strong middle class will yield a strong economy while a stressed and stretched middle class will result in stagnation and even decline. The broad middle is where the next big idea comes from, where small-business owners start off, and where Fortune 500 companies turn to stock their offices and warehouses with talented, efficient employees. The middle class is what makes the United States the most lucrative and dynamic marketplace in the world.
Consequently, policies that aim to strengthen the middle class, make it possible for more people to join its ranks, and support those who are going through temporary stress to rebound are policies that help produce growth. Over the course of the Clinton administration, the president and Congress agreed on a number of policies aimed directly and primarily at supporting working families to clear their path for success. They enacted:
The Clinton administration also saw that they could grow the economy by opening up the middle class to everyone willing and able to take on the responsibility of work. To that end, Congress and the administration promoted smart labor market policies that included:
Additionally, the Clinton administration strengthened those programs that help middle-class families weather economic storms, such as a major illness, a job loss, or a divorce. Those storms are common and can have huge effect on families’ welfare. From 2002 to 2007, for example, almost a third of the population had at least one spell of poverty lasting two months more. Under President Clinton’s watch, the administration and Congress agreed to boost public policies that make it possible for families to recover and regain a foothold in the economy, including:
Together, this broad mix of tax relief, wage increases, access to health and child care, and protections for working families helped grow and strengthen the middle class.
But as millions more Americans entered the middle class and real wages grew, President Clinton also met his goal of spending less on tax breaks for the wealthy and debt services—and giving the middle class more room to spend and grow the economy instead. And for the first time in 30 years, incomes of the bottom 20 percent of the workforce rose nearly as much as the top 20 percent, and the number of people living in poverty actually declined.
A 21st century economy
If there is one thing that most economists agree is a crucial ingredient for economic growth, it is investment. Across countries, higher overall investment levels are strongly associated with faster productivity growth, higher incomes, and better standards of living. No doubt, private investment is the main factor in overall investment levels but public funding has its place as well, especially in some key areas where, if left to itself, the private economy would tend to underinvest. And research shows that, in certain cases, public investments can actually help spur additional private investment as well. One 2003 study found that each dollar of government funding brought in an additional 70 cents of private investment that would not have otherwise been made.
From the start President Clinton outlined an investment strategy designed to increase public and private investment in areas critical to our economic future. For instance, his first budget proposal included a $30 billion package to put people to work building highways and renovating housing, and create new job opportunities for our nation’s youth. But the real accomplishments came later on in the investments Clinton championed and Congress made to prepare workers and students for a new information economy, to take advantage of the technology revolution emerging around the world, and to help high-tech industries prosper and grow.
The economic benefits of a quality education system are both obvious and well-researched. A highly trained, highly skilled workforce results in faster productivity gains, better adapts to changing circumstances, and produces more innovators and entrepreneurs. One recent study suggests that the United States would enjoy a $700 billion benefit if states with below-average educational performance managed to become merely average.
President Clinton in particular understood that in a globalized world, where America is competing with an increasingly international workforce, we must invest in Americans’ education at every level. And over the course of his administration, the federal government invested 10 percent more on average on education and workforce training than it had over the previous eight years. During his term, Congress also passed reforms that made higher education more affordable and more accessible. Specifically, Congress and the administration agreed to investments and reforms that:
Science and technology
When Clinton took office there were only 50 sites on the World Wide Web. By 2000 there were more than 50 million, and information technology accounted for a full third of U.S. economic growth. President Clinton credited this exponential growth to the early investments the U.S. made in the Internet, and during his term Congress and his administration directed similar investments toward other critical, innovative technologies and industries. Some of these investments included:
Roads and bridges, airports and seaports, highways and canals are all critical parts of a country’s infrastructure. Without them, goods and services cannot move efficiently, raising costs for consumers and dramatically limiting the potential for growth. The Clinton administration recognized this and sought to increase investments in these areas. In 1992 federal spending on transportation infrastructure totaled $40.9 billion, in inflation-adjusted 2000 dollars. By the year 2000, the last year of President Clinton’s term, that total was up 15 percent to nearly $47 billion.
But Clinton-era investments in infrastructure went beyond boosting funding for highway repair and airport upgrades. Under President Clinton Congress and the administration recognized early on that building a modern information and technology infrastructure was going to be just as important as improving traditional infrastructure elements. Some key investments in this emerging area included:
Certainly, President Clinton’s investments took place alongside those of the private sector. But there can be no doubt that his policy decisions helped expand access to the Internet and helped lay the foundations for the modern networks we now enjoy. In 1994, for example, only one in three public schools had Internet access in any form. By 1999 fully 95 percent of public schools boasted Internet access.
Strengthening and empowering communities
While conventional wisdom holds that there is a trade-off between equality and economic growth, President Clinton began to see that growth and equality can in fact go hand in hand. A growing body of research supports that view today. In particular, University of Southern California professor Manuel Pastor, analyzing the growth of 74 U.S. metropolitan regions in the 1980s, found that greater equality within regions corresponds with stronger regional economic growth. And a later study by Pastor and professor Chris Benner at the University of California, Davis, found that concentrated poverty, income inequality, and racial segregation drags down growth in older industrial cities—where growth is most needed—far more than it does to cities with stronger markets.
When President Clinton spoke about three values, he spoke about the importance of community, alongside opportunity for all and responsibility from all. And President Clinton believed a nation that lives as a community must value all its communities. Over the course of his administration, he promoted bold new programs to help American communities thrive—particularly those located in inner-city and poor rural areas—and to give residents of those cities the resources they needed to start a business, give back to their community, or feel safe on the streets. Those programs included:
Asking the wealthy to pay their share
When the Clinton administration took office in January 1993, the federal budget deficit for that year was expected to top $300 billion, or 5 percent, of GDP. The Congressional Budget Office projected that the budget would remain deeply in the red for the foreseeable future, calling the outlook “grim.” Budget analysts from across the political spectrum believed the country was headed for a debt crisis. And years of big federal deficits had sapped investor confidence and forced interest rates up for everybody. Several months prior, in February 1992, consumer confidence had hit its lowest level since 1974.
President Clinton recognized that in order to ensure America’s long-term growth and competitiveness, he first had to set the country on a stronger and more sustainable fiscal path. As President Clinton said in his first address to a joint session of Congress, “the more we spend paying off the debt, the less tax dollars we have to invest in jobs and education and the future of this country.” So in addition to the robust investments his administration promoted in people, in technology, and in communities, they also worked with Congress to close the fiscal gap and make room for the investments the economy needed in order to grow.
The Omnibus Budget Reconciliation Act of 1993 made significant cuts in spending, balanced over the course of five years. Just as important, President Clinton insisted that deficit reduction be accomplished such that the burden was borne fairly. That’s why Clinton’s 1993 budget, passed over the vociferous opposition of congressional Republicans, included revenue enhancements focused almost exclusively on those who benefited most from President Reagan’s tax reductions 12 years earlier—large corporations and America’s most affluent earners. These included:
As a result, the CBO projected at the time that the Omnibus Budget Reconciliation Act would raise $240 billion in additional revenue over the subsequent five years and would reduce spending by $191 billion over the same period. But because so many of OBRA’s revenue provisions were targeted at the wealthy, as the economy grew and incomes grew even faster, those same provisions generated even more revenue than was originally expected. By 1998 the federal government enjoyed its first budget surplus in nearly three decades—on its way to four straight years in the black. In the seven years following OBRA’s passage, business investment grew at a rate of 10.2 percent, compared to the growth rates of only 2.8 percent and 2.7 percent in the seven-year periods following the passage of President Reagan’s 1981 tax cut and President George W. Bush’s 2001 tax cut, respectively.
By turning the federal budget around, President Clinton accomplished three critical things. First, he reduced federal borrowing as the economy improved, allowing that capital to flow to more productive uses and giving the private sector a needed boost. Second, he allayed the fears of an impending debt crisis, taking that issue off the table. And third, the fiscal improvement allowed the government to focus on the other economic matters listed above—investing in the future, growing the middle class, mitigating poverty, and strengthening America’s communities.
Keeping America competitive
The Clinton administration also took steps to prepare the United States for the global economy of the future. President Clinton spoke frankly about the challenges globalization posed to workers and the economy, arguing that nations around the world could not dam up the tides of globalization nor tell their people to sink or swim on their own. Instead, he offered a clear vision for how America could thrive in the emerging global economy, both under his watch and long after his administration had come to a close.
First, Clinton saw that the global economy was only as strong as the sum of the skills, the ideas, and the education of millions of individuals around the world. That’s why in his “bridge to the 21st century” speech, Clinton put education first. “The single most critical thing we can do is to give every single American who wants it the chance to go to college,” he said, “but we must demand excellence at every level of education.” He insisted that students learn the basics they need for the next century, that every student should be able to read by the third grade, and that every library and classroom should be connected to the internet by the time he left office.
Second, President Clinton advocated for robust investment in science and the technologies that would provide the foundation for the future economy. Clinton unveiled a National Nanotechnology Initiative in his final budget that would have invested nearly $500 million in nanotechnology research, unlocking the potential for new scientific discoveries that advance our manufacturing, health care, environment, and national security goals.
His final budget also requested a $2.8 billion increase in the “21st Century Research Fund” to invest in biomedical research, information technology, and clean energy. As Clinton told students at the California Institute of Technology in 2000, American technology leadership was central to the strong growth the country enjoyed under his administration—and robust future leadership would be needed for the United States to continue to benefit from all the advantages that leadership conferred in the future.
Third, President Clinton continued to press for open markets while laying out a vision of how trade could better benefit everyone. He argued that increased trade would boost U.S. exports, make cheaper goods available to American consumers, and spur innovation around the world—particularly in the information economy he felt was so important. But President Clinton also made clear that the international community had a fundamental responsibility to make sure that open trade actually lifted living standards and protected worker and human rights.
Finally, Clinton made it clear that in an age of instant global communications and emerging economies, the United States had to engage the global economy—but not by surrendering to a “race to the bottom,” easing environmental regulations and allowing wages to fall. Rather than bringing America down, Clinton maintained that it was important to help the global economy lift up other nations and make life better for them and better for us.
To that end, he advocated for strong safety nets that empower the poorest people and make sure that everyone can weather increasingly global economic storms. He tried to provide for the workers who may be displaced by globalization both by beefing up our export promotion activities and by increasing funding for training displaced workers. He signed an executive order requiring careful environmental review of major trade agreements and urged global cooperation to help every nation develop along a cleaner path. And he emphasized the importance of helping workers everywhere feel the dignity of work, the respect of basic rights in the workplace, and the ability to help shape their own economic future.
No president deserves total blame or total credit for the economic outcomes that arise under his watch. But undoubtedly President Clinton’s policies helped spur the economy out of the doldrums by focusing on the middle class and by making targeted public investments. He removed potential obstacles by putting the federal budget onto a sustainable path that eventually resulted in surpluses, and by adroitly resolving international economic crises that threatened to derail U.S. progress. And he laid the foundation for continued growth by investing in infrastructure and education, and by protecting the safety net, bringing millions out of poverty and into the workforce. These are successful strategies that could and should be repeated.
Yet during the “lost decade” that followed in the first decade of the 21st century, many of these lessons were forgotten. Moreover, we lost a golden opportunity to build America’s future from strength to strength. Rather than continuing to invest in people and innovation to prepare our economy for the looming challenges of globalization and technology, the Bush administration’s policies:
The consequences of that dangerous experiment are clear, and the missed opportunities cannot be regained.
But going forward we can learn lessons from what economists Alan Blinder and Janet Yellin called “the Fabulous Decade” of the Clinton administration to avoid reliving the lost one. Despite the fact that both Presidents Clinton and Obama inherited challenging economic circumstances from their predecessors, the situation today is far from analogous to the one in the early 1990s. Today we are facing the prospect of a long, hard climb out from, by far, the worst economic crisis in 70 years. In the fourth quarter of 2008, the quarter before President Obama took office, the economy contracted at an annualized rate of nearly 9 percent. That was the second-sharpest quarterly contraction on record, followed in the first quarter of 2009 by the fourth-sharpest contraction. In the worst quarter during the recession of the early 1990s, the economy shrank by 3.5 percent.
Nevertheless, as we do our best to emerge from the long shadow cast by the bursting of the housing bubble and the subsequent financial meltdown, we would do well to consider Clinton’s record of success. Now, as then, we face an economy working for too few of us, and the top 1 percent not shouldering their share of the burdens to pay for the mistakes of our past or to invest in our future. Now, as then, our federal government has a role to play to lay the foundations for future growth and prosperity so that the private sector can do what America does best—innovate and lead. And now, as then, the middle class has been under assault and must be strengthened.
This article was published by the Center for American Progress.