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Could Bill Clinton Have The Answer?
Finance
Perspective on the News
Monday, October 04, 2010
Ed DeShields

In no other period of American history has our government followed policies as similar to those of the Great Depression era.

Today's lagging growth and persistent high unemployment are suggestive of the 1930s.  Federal debt rose 150% from 1929-1939. Federal spending grew by 77% from 1932 to 1934 as the New Deal was implemented.  The top individual income tax rate rose to 79% during the Roosevelt administration. Corporate rates were increased to 15% from 11%, and when private businesses did not invest, Congress imposed a 27% undistributed profits tax.

Both periods had liberal Democrats at the helm.  Franklin D. Roosevelt was president then.  Barack Obama is president now.    

By 1939, the economies of the U.K. and Italy were improving and vastly different from the U.S. liberal Democrat-led government.   And the results showed it.  Total employment was rising 10% and 12%, respectively.  Industrial production in the six most developed countries was almost 16% above their 1929 levels by the end of 1938.  Yet, in the United States industrial production had declined by 20%.

Winston Churchill noted in "Great Contemporaries" (1939) that, "The disposition [for FDR] to hunt down rich men as if they were noxious beasts is a very attractive sport."

The great debate of whether the Republicans or Democrats have a better way forward is an argumentitive one.  Liberal Democratic administrations have tended to stress lowering unemployment and interest rates, stimulating economic growth, spending federal money on domestic programs and increasing government regulation of business. Republicans generally emphasize lowering inflation and spending less money on federal projects.  They avoid spending money on stimulating the economy preferring to let the market tend to itself. 

But today, our current economic policies aren’t working.

Bill Clinton was a Democratic president that proved himself to be an anomaly from all prior Democratic presidents on record.   Setting aside the issue of morality, when you compare policy outcomes in the Clinton era with those of other postwar Democratic and Republican presidencies you will find Clinton more like a moderate Republican in four policy areas:  macroeconomic policy, fiscal policy, monetary policy, and regulatory policy.   Bill Clinton broke from traditional liberal Democratic ranks almost universally.   

Clinton was a vocal advocate of free trade – a typically Republican trait.   Labor unions have loathed the North American Free Trade Agreement, the World Trade Organization (WTO), and permanent normal trade relations with China as costing jobs in the United States.  Clinton brought them to the forefront of his policy and encouraged them into law. 

When traditional Democrats hold the Presidency we tend to have larger increases in discretionary domestic spending than those years when a Republican occupied the Oval Office.  Democratic spending in the 1960s was large and consistent.  However, the Clinton era resembled that of Republican regimes.   

Setting aside the Reagan years, the annual percentage increases in discretionary domestic spending under Clinton have been smaller than those of any Republican presidents since 1960.  Clinton even kept spending down even when tempted by a Democratic majority in Congress.

While Republican presidents have consistently pledged to deficit reduction, Democratic administrations have generally been more fiscally responsible.  In the 1950s, President Eisenhower may have vigorously pursued a balanced budget, but during the 1980s and 1990s the Reagan and Bush administrations allowed the deficit to balloon to its highest levels in history. However, because almost all postwar Republican presidents have had to contend with divided government, congressional Democrats share the responsibility for any deficits.  

In any event, Clinton’s deficit politics separated him from his Democratic predecessors.  By 1998, with the budget in surplus for the first time since 1969, Clinton had clearly rejected the post-1980s higher-deficit environment. Bill Clinton was a new kind of Democrat.

Clinton rejected the Democrats desire to preside over the enactment of more legislation.  The amount of legislation that augmented or depleted the federal Treasury from 1947 to 1998 was reduced during the Clinton era resembling the Eisenhower and Reagan-Bush periods.  Clinton contrasted greatly with the fiscally expansive legislation passed under other Democratic presidents, especially Kennedy and Johnson. 

With respect to the tax burden, Clinton did not shift the individual tax burden.  We would have expected a Democratic president to alter policy to force the rich to pay more but Clinton closely resembled that under Reagan and Bush—that is, the highest-income quintile of the population has carried more of the tax burden only because its share of national income has increased.

Clinton may have raised the effective marginal tax rate a little, but it was still considerably lower than the 50 percent of the early 1980s and much lower than the huge punitive rates of the 1960s and 1970s. 

By a considerable margin, the stock market posted the best annualized returns during any presidential tenure since World War II.   Indeed, at number one in annualized returns for the Dow Jones Industrial average, Clinton is the only Democrat in the top five, followed by Reagan at 16 percent, Bush 13 percent, Eisenhower 13 percent, and Ford 12 percent. The closest any Democrat gets to Clinton is Kennedy’s 8 percent annualized increase.

Clinton’s performance is a clear repudiation of a Keynesian “consumption-led” approach that has been the hallmark of liberal Democrats, and is more like the Republicans’ “investment-led” philosophy.

Winston Churchill said, “It is indispensable to the wealth of nations and to the wage and life standards of labour, that capital and credit should be honored and cherished partners in the economic system. . . ."

Will liberal Democrats lead us to prosperity?   Not likely, but we should hope that they at least take a lesson from Bill Clinton.

About Ed DeShields

Last week: Ex nihilo. Out of Nothing the Fed Risks everything. 



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