The Most Fiscally Conservative President...

The Exceptionally Nasty Politics of Unemployment… And the Most Fiscally Conservative President in the Last Thirty Years

By J.M. Hamilton  (Originally Published July 17, 2010)

Here’s a hint, it sure wasn’t Reagan…

This week President Obama named a new budget director to replace Peter Orszag.  The President was quoted as saying: "If there was a hall of fame for budget directors, then Jack Lew surely would have earned a place for his service in that role under President Clinton when he helped balance the federal budget after years of deficits," and "Jack is the only budget director in history to preside over a budget surplus for three consecutive years."

It’s been awhile, what does a budget surplus look like, and for that matter, how does an unemployment rate of less than 5% appear?   Both, the budget surpluses, Mr. Obama wistfully commented on, and an unemployment rate of less than 5% occurred under President Clinton’s watch.  These highly enviable economic results didn’t come easy to President Clinton, and they occurred during a personally painful time for the President, his second term. 

The nation’s unemployment rate during the ‘90s:

1992	7.49		Bush H.W.
1993	6.91		Clinton
1994	6.10
1995	5.59
1996	5.41
1997	4.94
1998	4.50
1999	4.22
2000	3.97

Source:  http://www.miseryindex.us/urbyyear.asp

Hind sight is 20/20, and we now know that Clinton was not a favorite in the business community and of many ultra wealthy investors, in either of his terms in office.  The nation’s top income tax rate was 39% under Clinton, up from 28 and 31% under H.W. Bush (interestingly enough, this same tax bracket was 50% for much of Reagan’s two terms in office).   So here’s Clinton jacking up the tax rate on the rich, the wealthy, the investor class (stealing the punch bowl at the great capitalist party), and he’s an absolute pariah among Republicans; in short, Clinton was viewed very much in the same manner President Obama is viewed by the rich, today, for threatening to snatch away the Bush (W) tax cuts (who lowered Clinton’s top tax rate to 35%).

Boy, talk about your economic buzz kill!  All manner of conservative economist, republican politicians, and many CEO’s, will tell you that a tax increase in the middle of a recession is a sure way to derail the economy, and will make matters worse.  But after Clinton was reelected exactly the opposite happened, the economy jumped and hard:  U.S. GDP grew from approximately  7.5 trillion in ’93,  to nearly 10.0 trillion in 2000, almost 2.0 trillion of that growth, the lion’s share, came during Clinton’s second term.

So what happened?  Well, I don’t have a crystal ball, and it’s beyond my skill set to be able to peer into the hearts and minds of the business/corporate elite, but here’s my hypothesis:  the plutocracy, possibly, held up on their investment plans in the hopes that Clinton was a one term wonder.   Maybe, just maybe, corporate American and the banks slowed up on hiring and loans, so as to run the Arkansas wunderkind out of office?   After all, CEO’s are people too, and we know that the many of them are Republican.  Gee, wouldn’t it be human nature to make things tough on the political opposition and take a wait and see mentality (particularly if you are wealthy), slow down on the spending/investments a little?  Meanwhile the economy is tough; the public – who’s also experiencing the financial pain of an early ‘90s recession, albeit more painfully – could conceivably empathize with the business community, if investment and jobs weren’t exactly forthcoming.

Back at the White House, Clinton hooked up with a campaign advisor, Dick Morris (former advisor to the most right wing Senator to enter the halls of U.S. Senate, in the modern era – Jesse Helms); and Clinton turned right of center before his second term, at least in terms of taking on a more “pro-business” stance.    In ’96, Clinton, with some help from Perot, ran over Bob Dole, smoking him by nearly 10 million votes.  Clinton, who had also signed NAFTA and presided over a considerable amount of banking  deregulation, was not just watching the revenue side of the ledger with his tax increase, but like any good accountants, Jack Lew and the President were also watching the spending side.   Clinton, keeping an eye on government expenditures, signed:  the Personal Responsibility and Work Opportunity Act, or simply put welfare reform.

Following through on my hypothesis then, the business community, seeing that their efforts to unseat the President had come to naught, may have decided that sitting on the sidelines for the balance of the ‘90s was not fun and costing them money; and hence, cranked up the show.  The banking and business elites learned to live with the Clinton tax increase, and a Democrat in the White House.   The economy, the Street, and profits roared to life - reaching the pinnacle for that era with the Dot.com boom and the Dow’s 10,000 benchmark. 

Messrs. Clinton and Lew went on to hand the Texas usurper three years of budget surpluses, which he promptly wasted on two wars, irresponsible tax cuts, and profligate government spending and deficits (but that’s a story that is still firmly burned in the nation’s collective memory).

Are we, as a nation, revisiting circa ’94-’95 all over?   Again, we have a Democrat in the White House, who’s had to take – through no fault of his own – some tough stances with the business community and is about to enact very modest bank regulatory reform.   We know many corporations are flush with cash, holding on to that cash very tightly, and not investing said cash in CAPEX or new hires; we know that some very large banks, having received the mother of all bailouts, are also flush with liquidity, enjoying a Fed Funds rate at or near zero percent.   

Key question:  Could some members of the business elite be waiting or biding their time?  Waiting out this administration, in the hopes that Obama is a one trick pony?    Maybe.  Perhaps?   Afterall, if the economy continues to perform poorly, and unemployment remains high enough, Americans just might vote the President and his party out of office, or so the reasoning goes.

To be sure, there are exogenous and endogenous economic variables today that make the early 90’s recession not entirely analogous, like the financial Armageddon unleashed on an unsuspecting citizenry by firms such as Goldman Sachs, Countrywide S&L, and AIG.   The inherited debt to GDP ratio is definitely higher for this sitting President.   And unlike Clinton, Obama did see some semblance of “healthcare reform” signed into law.

That said, the shrill cries that Clinton faced are not dissimilar to the anger faced by Obama…. Complaints that Obama is a socialist and anti business, by the Chamber of Commerce set, were also faced by Mr. Clinton in the ‘90s.  Could it be that some part of our nation’s present economic misery is by calculated political design then, from some elites keeping too tight a grasp on the purse strings, and what would cause them to spend, or loan, again?  If these same elites (banking and business) are indeed, biding their time, then we can only hope that a good showing by the Democrats in November 2010 will quite possibly hasten their desire to accept both bank reform and the possible end of the Bush era tax cuts, and partake of the great capitalist party once again.

Who knows?  With increased business expansion and a resulting increase in government receipts might President Obama and Mr. Lew be incited to enact some Clintonian cuts in federal spending?

If the Clinton years are indeed analogous to the Obama years, let’s hope that the midterm elections in 2010, and Obama’s reelection in 2012, sets off an economic renaissance.

 Copyright JM Hamilton Publishing 2013