In other words, Bush is a macro-economic genius, Clinton just got lucky.
Déjà vu for the U.S. economic cycle
By Eduardo Porter and Jeremy W. Peters
Monday, February 12, 2007 | The New York Times
It is five years into an economic expansion and most Americans are still waiting for their share. Inflation is swallowing pay raises. Businesses are hiring, but forecasters worry the economy may be about to stall. "If this is a recovery," the leader of the political opposition complains, "I can hardly wait for the recession."
This may sound like the stuff of headlines today. But it comes from 1996, when Bill Clinton was president and his rival was Bob Dole, the Republican nominee. The economic expansion in question, which got off to a sputtering start in March 1991, was to become the longest period of uninterrupted growth in U.S. history.
Now, half a decade into an expansion that officially started in November 2001, the economy is showing remarkable parallels with what it looked like about a decade ago.
"It's striking how similar they are," said Robert Gordon, an economics professor at Northwestern University.
The overall rate of growth has followed a trajectory almost identical to the first five years of the 1990s expansion. Now, as then, corporate profits have surged; the stock market has, too. But just as workers have finally begun to reap some of the spoils of a growing economy, many forecasters worry — as they did a decade earlier — that the expansion is running out of steam.
What is striking, considering these similarities, is how little effect the policy choices of Democratic and Republican administrations seem to have had on how both growth cycles unrolled.
Few economic forecasters expect the current growth cycle to have the length and vigor of the 1990s boom, which continued for 10 years from trough to peak. Yet fewer expected strong growth in the mid-1990s. In early 1996, forecasters polled by the Federal Reserve Bank of Philadelphia predicted that the economy would grow merely 1.8 percent that year. The economy ended up growing at twice that pace.
Average Americans were more pessimistic then than they are now. According to Gallup Poll's most recent snapshot of public opinion, last month 52 percent of Americans rated economic conditions as "excellent" or "good." In May 1996, only 30 percent did so.
"Consumers don't expect a slowing economy," said Richard Curtin, who heads the surveys of consumers at the University of Michigan. "According to consumers, we are going to improve."
Given the parallels, perhaps it is not surprising that the economy is providing the same sort of political ammunition as it did 10 years ago.
"Profits are up for our companies, but where are the wage increases?" Senator Hillary Rodham Clinton, the New York Democrat who is running for president, asked during an online conversation with voters last month. "Where are the, you know, the benefits that should accrue to hard-working Americans?"
Wage increases have, indeed, been slow in coming. In December, 61 months after the economy started to grow, the wages of production and other non-management workers were barely 1.7 percent higher, after inflation, than when the economy hit bottom in November 2001. Most of those gains came in the last few months.
But many people have forgotten that, initially, the expansion of the 1990s was also dubbed a "jobless recovery," and then a "joyless" one, when employment started growing but real wages did not.
Advocates on each side insist that government policy was crucial to steering the economy. Gene Sperling, a former economic adviser to Bill Clinton, argued that his administration's efforts to cut the budget deficit were instrumental in bringing down interest rates and improving investors' confidence in the economy.
By contrast, Edward Lazear, President George W. Bush's chief economic adviser, argued that the tax cuts enacted by the administration in 2003 deserve some credit for the current expansion. "They had a fundamental impact on investment," Lazear said. "There was an abrupt turnaround at the point when those tax cuts were put into effect."
There are substantial differences, of course, in the nature of the two expansions. The early 1990s were characterized by a building bust; the current one has been supported by a housing bubble. The boom of the second half of the 1990s was underpinned by an Internet-driven investment bubble, but most technology stocks today are far below their earlier highs.
"In both situations we had overinvestment, now in housing, then in fiber optics," said Joseph Stiglitz, a professor of economics at Columbia University who was a chief economic adviser in the Clinton administration.
Bush and Clinton had very different economic priorities and will leave very different economic legacies. Clinton increased the top marginal tax rate to 39.6 percent from 31 percent and closed the budget deficit. Bush cut tax rates back to 35 percent, and the deficit reappeared. Corporate profits have swollen twice as fast, as a share of the economy, in the first five years of this expansion, under Bush, as in the like period of the previous one.
Still, policy has had less effect on the distribution of the rewards of growth than the stated goals of Democrats and Republicans would suggest. Indeed, the share of the economy devoted to workers' compensation shrunk as much in the first five years of the 1990s expansion, to 56.3 percent of gross domestic product from 57.7 percent, as in the most recent five years, when it fell from 58.1 percent to 56.6 percent.
No one knows how this expansion will end. In the 1990s, nearly all the gains for ordinary Americans occurred in the second half of the decade.
"If we conjecture another five years of the current expansion, I think it's going to be another surprise," said Gordon, the professor at Northwestern. "We had a good surprise in the '90s, but this time I think we're in for a series of bad surprises."
One ingredient that helped drive the 1990s expansion is missing today: the explosion of productivity growth that took off in the mid-1990s and lasted for more than a decade, when the investments that firms began to make in technology in the 1980s started to pay off.
"It's kind of hard to point to anything like that now," said Ken Matheny, senior economist at Macroeconomic Advisers. "It's difficult to say that we're about to have another productivity and investment boom as we saw in the late '90s."
Productivity grew by 3 percent in the last quarter of 2006. Still, for the full year, it grew only 2.1 percent for the year, which is the slowest since 1997.
Even as growth has remained on a remarkably similar path in both decades, administration critics say that Bush's policies have weakened the economy's longer-term prospects.
Stiglitz argued that Bush's tax cuts, aimed mostly at the wealthy, opened a big hole in the budget and provided little stimulus to the economy. This forced the Federal Reserve to push interest rates very low to keep the economy afloat, he said, creating a bubble in housing.
Under a more effective fiscal policy, Stiglitz said, "growth would be more broadly based and less of the economy would depend on real estate."
Sperling suggested that the mushrooming of the U.S. trade imbalance and the reappearance of large budget deficits have not caused more damage to the economy because money flooding into the United States from China and elsewhere has kept long-term interest rates low, underpinning investment and consumption. That support, he suggested, will eventually dry up.
"We are in a moment where excess savings are coming from India and China, so perhaps it is a moment in which fiscal irresponsibility won't have as negative short-term consequences," Sperling said. "But it has increased the risk factor in the economy. It is still poor long-term policy."
Meanwhile, the housing bubble has turned to bust, dragging residential investment down. Overall growth has been little affected so far, but many economists still expect household finances to weaken, cutting into consumer spending, the main bulwark of economic growth.
"Maybe we dodged a bullet, but you don't know," said Jeffrey Frankel, an economics professor at Harvard.
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